HEDGE FUNDS INCREASING SHORT POSITIONS IN THE STOCK MARKET AS THEY BELIEVE AI RALLY IS OVERDONE

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By Nigam Arora & Dr. Natasha Arora

To gain an edge, this is what you need to know today.

AI Frenzy

Please click here for a chart of S&P 500 ETF (SPY) which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

  • The chart shows that the stock market has had difficulty rocketing through the resistance shown in red to the next resistance zone.
  • The momo guru narrative is that the stock market has been constrained due to the debt ceiling issue and the stock market will rally significantly on the news of an agreement on the debt ceiling.
  • In contrast to momo gurus, the narrative of stock market bears is that a debt ceiling resolution will be a ‘sell the news’ event.
  • The body language of both sides is optimistic on a debt ceiling resolution.
  • Politically, both sides have no option but to do the dance of their hard lines until the last moment to satisfy their bases.
  • Hedge funds are increasing their short positions on the belief that the AI frenzy driven rally is overdone.  On one hand, hedge funds are sophisticated and do great analysis.  On the other hand, if the market continues to go higher, hedge funds will be forced to buy to cover their short positions, and thus provide significant additional fuel to power the stock market higher.
  • In The Arora Report analysis, the stock market would have been down 10% this year instead of being up about 9% if it was not for the artificial intelligence frenzy.  For those wanting next-level information, the podcast titled “Don’t Be Fooled: AI Frenzy Driving Unhealthy Stock Market” is now live.
  • Nvidia (NVDA) stock is the leader of the artificial intelligence stock market rally.  Nvidia earnings are Wednesday after the close.  Nvidia earnings have the potential to change the course of the AI frenzy driven stock market rally.
  • As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.
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Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) stocks in the early trade.  Smart money is 🔒 in the early trade.

Gold

The momo crowd is 🔒 gold in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see gold and silver ratings.

Oil

Saudi Energy Minister is warning speculators who are short selling oil of pain. OPEC+ appears to be working on a surprise to run up oil. 

The momo crowd is 🔒 oil in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin is rallying and is now above $27,000. Contrary to the belief in the stock market, the reason that is being promoted to buy bitcoin is the potential failure of debt ceiling talks.

Markets

Our very, very short-term early stock market indicator is 🔒 but can easily turn based on the progress in debt ceiling talks.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Interest rates are ticking up, and bonds are ticking down.

The dollar is stronger.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

Gold futures are at $1960, silver futures are at $23.36, and oil futures are at $73.07.

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S&P 500 futures are trading at 4193 as of this writing.  S&P 500 futures resistance levels are 4000, 4318, and 4400: support levels are 4000, 3950, and 3860.

DJIA futures are down 85 points.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding 🔒 in cash or treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

Traditional 60/40 Portfolio

Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less.  Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.

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Picture of Nigam Arora

Nigam Arora

Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.

Picture of Dr. Natasha Arora

Dr. Natasha Arora

Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.

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