By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Raise Cash And Hedges
Cash and hedges are being raised. Scroll down to the “Protection Band And What To Do Now” section below.
Be forewarned that this decision may need to be quickly reversed depending upon the upcoming inflation data and earnings. If the inflation data comes out better than expected and earnings start coming out better than expected, the market mechanic of year end chase will take over. This market mechanic has the potential to run up the stock market by as much as 10% – 15%. You gain an edge when you understand market mechanics. For those interested in next-level information, listen to the podcast titled “Market Mechanics: Gain An Edge From Year End Chase.” The podcast is available in Arora Ambassador Club.
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 fallen below the low band of the top support zone.
- The chart shows that the stock market is now approaching the 200 day moving average. There is nothing special about the 200 day moving average. Why not 180 days or 220 days? However, a legion of people believe in the power of the 200 day moving average, and this average has power because of the blind belief. Expect bulls to make the case that the 200 day moving average is going to act as support and the stock market is going to bounce from here. Expect bears to make the case the stock market is going to break the 200 day moving average and go lower.
- The chart shows the support zone. The stock market can go to the support zone only if the Fed speak is negative and there are rumors about CPI and PPI next week.
- PPI will be released on October 11.
- CPI will be released on October 12.
- The jobs report is extremely strong with the exception of average hourly earnings. Here are the details:
- Non-farm payrolls came at 336K vs. 158K consensus.
- Non-farm private payrolls came at 263K vs. 150K consensus.
- Unemployment rate came at 3.8% vs. 3.7% consensus.
- Average work week came at 34.4 vs. 34.4 consensus.
- Average hourly earnings came at 0.2% vs. 0.3% consensus.
- Investors should note that an increase of 0.2% in average hourly earnings translates to a 2.4% average annual raise. This is at a time when unions are demanding very large raises. The data shows that workers outside of unions are getting raises on the order of about 2%.
- Yesterday, some momo gurus were predicting a 1000 point DJIA rally. In yesterday’s Afternoon Capsule, we wrote:
Start with Arora’s second law: Nobody knows with certainty what is going to happen next in the markets. Momo gurus do not have any special knowledge or information. They are simply doing their job of getting their followers excited to buy stocks.
- What are momo gurus going to do now that they were so wrong? Momo gurus are often wrong, so this is nothing new. They still insist on claiming to know that they know what is going to happen next. Even though their gurus are wrong most of the time, the momo crowd continues to follow them. None of this is going to change. Expect momo gurus to come up with a new narrative around an annualized wage increase of 2.4% to try to run up the stock market.
- Exxon (XOM) is rumored to be in advanced talks to buy PXD for $60B. Such a large buyout has the potential to generate excitement in the stock market and run several oil stocks up.
- As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the protection band.
Magnificent Seven Money Flows
In the early trade, money flows are negative in Amazon (AMZN), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG), Meta (META), and Apple (AAPL). Money flows are very negative in Tesla (TSLA). Tesla is cutting prices again.
In the early trade, money flows are negative in S&P 500 ETF SPY and Nasdaq 100 ETF QQQ.
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 *** stocks in the early trade.
The momo crowd is *** in gold in the early trade. Smart money is *** in the early trade.
For longer-term, please see gold and silver ratings.
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 (BTC.USD) is range bound.
Our 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.
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 $1831, silver futures are at $21.25, and oil futures are at $82.26.
S&P 500 futures are trading at 4256 as of this writing. S&P 500 futures resistance levels are 4318, 4400, and 4460: support levels are 4200, 4000, and 3950.
DJIA futures are down 72 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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