By Nigam Arora
To gain an edge, this is what you need to know today.
Oil Leading Stocks
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 markets always have crosscurrents.
- The chart shows zone 1 (support). This is the most important point on the chart for investors right now.
- The chart shows the stock market is making lower lows. This is a negative pattern.
- The chart shows that today, the low in the stock market was significantly lower than where it is trading as of this writing in the premarket. The low was traced as oil prices shot up.
- The chart shows that in the early trade so far today, the stock market has aggressively rebounded from the lows as oil pulled back. This is a positive.
- RSI on the chart shows that the stock market is oversold. Oversold markets tend to rebound.
- The chart shows when The Arora Report gave a signal to raise cash and hedges prior to the recent drop. The U.S. and Israel attacked Iran on February 28. One day earlier, on February 27, based on the adaptive ZYX Asset Allocation Model with inputs in ten categories, The Arora Report raised the Arora Protection Band. The Arora Protection Band is an easy to use, practical embodiment of dynamic hedging, dynamic allocation to cash, and dynamic allocation between strategic positions and tactical positions.
- The rebound in the stock market came on the prospect of G-7 countries potentially releasing oil from reserves. The prospect of the release of oil caused the price of oil to quickly pull back after the global benchmark Brent crude traded above $115 earlier. West Texas Intermediate (WTI) crude oil futures have pulled back to around $101 as of this writing after having traded over $119 earlier.
- As a member of The Arora Report, you already know the importance of positioning. Traders have been heavily positioned on the short side, especially in WTI, for the following reasons:
- Traders believed the war would be short lived.
- Traders believed the U.S. and Israel would beat Iran into submission quickly.
- Traders believed that the U.S. Navy and insurance to be provided by the U.S. would keep oil flowing through the Strait of Hormuz.
- Traders believed Saudi Arabia and Gulf nations would continue oil production more or less as normal.
- As a member of The Arora Report, you have been ahead of the curve. We cautioned you from the beginning that the prevailing wisdom on Wall Street of the Iran war being very short lived and no change in oil supply might be wrong. We also shared with you in detail as to why oil might stop flowing through the Strait of Hormuz – that call has now proven spot on.
- Overnight, a massive short squeeze occurred in oil for the following reasons:
- Instead of agreeing to President Trump’s demand for Iran to unconditionally surrender, Iran became even more defiant.
- Iran elected Khamenei’s son as the new supreme leader instead of a centrist as the U.S. had demanded. The U.S. had clearly said electing Khamenei’s son was not acceptable.
- Israel hit oil storage tanks in Iran. There are unconfirmed reports that this is not what the U.S. wanted. This has given Iran license to hit oil infrastructure.
- Gulf nations started reducing oil production as storage filled. Expectations rose that Saudi Arabia would follow. As of this writing, Saudi Arabia has also slowed oil production.
- In The Arora Report analysis, President Trump is perfectly positioned to declare victory for the following reasons:
- Significant damage has already been inflicted on Iran.
- President Trump has already achieved many of his objectives.
- President Trump is very sensitive to gas prices.
- President Trump is also very sensitive to the stock market.
- President Trump has an eye on the midterm elections.
- As always, investors need to remain data dependent. Having said that, as a heads up, here is the tentative plan under different scenarios:
- If the stock market reaches the support zone shown on the chart and President Trump starts showing signs of declaring victory, based on the adaptive ZYX Asset Allocation Model with inputs in ten categories, there is likely to be a buy signal.
- If President Trump shows no signs of declaring victory and the stock market breaks below the support zone shown on the chart, the Arora Protection Band is likely to be raised.
- Today is the 17th anniversary of the start of a long uptrend after the Great Financial Crisis. The long uptrend has been punctuated by short bear markets. During the Great Financial Crisis, the S&P 500 fell by about 50%.
- The stock market bottomed on March 9, 2009, with the S&P 500 at 666. Since then, the S&P 500 has risen more than 10-fold.
- Of note is that on March 9, 2009, The Arora Report gave a “back up the truck and buy stocks” signal. At that time, it was a bold contrary call because the S&P 500 was cut in half. Almost all analysts were bearish and sentiment was extremely negative. Little did we know, hindsight would show us the stock market bottomed that day and has been on a 17-year uptrend. The Arora Report’s back up the truck and buy stocks signal was based on the adaptive ZYX Asset Allocation Model with inputs in ten categories.
- Investors do well when they get ahead of the curve. Looking ahead, due to the long uptrend over the last 17 years, there is now more risk in the market than investors generally believe. Here are the reasons for the increased downside risk:
- Investors have grown complacent. This presents a big risk to the market.
- Investors suffer from recency bias. Investors believe the road ahead will be the same as the road behind. The road ahead may turn out to be very different from the road behind.
- Valuations are very high.
- “Buy the dip” mentality is deeply entrenched.
- Passive investing is in vogue. Passive investors are essentially blind money investing in the market irrespective of market conditions. In history, there have been periods when passive investing did not work well.
- The momo crowd is dominant in the stock market. The momo crowd ignores deep analysis and investing discipline and is oblivious to risk. The momo crowd simply believes the market is only going higher and uses only momentum strategies.
- All investors should consider a practical approach to protect their portfolios. A practical approach should consist of the following:
- Dynamic hedging
- Dynamic allocation to cash or short term Treasury bills
- Dynamic allocation between strategic long term investments and shorter term tactical trades
- Uncorrelated assets
- With the benefit of hindsight, raising the Arora Protection Band one day before the Iran attack seems spot on so far. This puts members of The Arora Report in a position to take advantage of new opportunities and have a lower drawdown compared to those who are fully invested in the stock market.
- Investors need to balance the risks to the downside if the war is prolonged with a potential quick move higher if the war ends. Following the Arora Protection Band is a practical, actionable way to accomplish this goal.
- Oil stocks in The Arora Report portfolios have done well. The plan is to take partial profits if President Trump starts showing signs of declaring victory. VanEck Oil Services ETF (OIH) is in the ZYX Allocation Model Portfolio. Shell (SHEL), Halliburton (HAL), and Chevron (CVX) are in ZYX Buy.
- As an actionable item, the sum total of the foregoing is in the Arora Protection Band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the Arora Protection Band. The Arora Protection Band is one of the large number of unique edges that are available to members of The Arora Report.
Magnificent Seven Money Flows
Most portfolios are now heavily concentrated in the Mag 7 stocks. For this reason, to get ahead and get an edge, investors need to dig below the surface of the Mag 7 stocks. It is equally important to rise above the noise of daily news on the Mag 7 stocks. The best way to get an edge, dig below the surface, and rise above the noise of the daily news is to pay attention to early money flows in the Mag 7 stocks on a daily basis. When there is significant news in the Mag 7 stocks that rises above the threshold of noise and impacts your entire portfolio, it is covered in the main section above.
In the early trade, money flows are negative in Amazon (AMZN), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG), Meta (META), Tesla (TSLA), and Apple (AAPL).
In the early trade, money flows are like a yoyo in S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ).
Momo Crowd And Smart Money In Stocks
The momo crowd *** (To see the locked content, please take a 30 day free trial) in stocks in the early trade. Smart money is *** in the early trade.
Note for new members: Smart money often sells into the strength generated by momo crowd buying and buys into the weakness generated by momo crowd selling. Over a long period of time, investors come out ahead by adopting smart money’s ways. The exception is in a raging bull market – for very short term trades, consider following the momo crowd and not smart money. Smart money is an important indicator but is only one of hundreds of indicators that go into determining the Arora Protection Band and signals. Please click here and here to understand how signals are generated.
Very Very Short-Term Indicator
The Arora Report’s proprietary very, very short-term early stock market indicator is ***. 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.
Gold
The momo crowd is *** in gold in the early trade. This is reflected in gold ETF (GLD), silver ETF (SLV), gold miner ETF (GDX), and silver miner ETF (SIL). Smart money is inactive in the early trade.
For longer-term, please see gold and silver ratings.
Oil
The momo crowd is *** in oil in the early trade. Smart money is *** in the early trade.
For longer-term, please see oil ratings.
Bitcoin
Bitcoin (BTC.USD) is range bound.
Markets
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.
S&P 500 futures are trading at 6681 as of this writing. S&P 500 futures resistance levels are 6500, 6256, and 6131 : support levels are 7200, 7000, and 6780.
DJIA futures are down 613 points.
Gold futures are at $5117, silver futures are at $84.15, and oil futures are at $100.64.
Arora Protection Band And What To Do Now
It is important for investors to look ahead and not in the rearview mirror. The proprietary Arora Protection Band from The Arora Report is very popular. The Arora Protection Band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.
Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding *** in cash, Treasury bills, short term fixed income, 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.
A protection band of 0% would be very bullish and would indicate full investment with 0% in cash. A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.
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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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.
