By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Generating High Risk Adjusted Returns
Please click here for a chart of Coca-Cola Company stock (KO) and Nvidia stock (NVDA). KO chart is in the top pane. NVDA chart is in the bottom pane.
Note the following:
- The Morning Capsule is about the big picture, not an individual stock. The charts of KO and NVDA stocks are being used to illustrate the point.
- The chart shows that KO stock hit an all time high.
- On the same day KO stock hit an all time high, NVDA lost a record $279B. This was the worst day for NVDA ever.
- KO is in the ZYX Buy portfolio that surrounds the core Model Portfolio. NVDA is in the core Model Portfolio.
- The chart shows that while NVDA has not only fallen but has been very volatile, KO has gone straight up in a smooth manner. KO stock is an illustration of a high risk adjusted return, whereas there is high risk in NVDA stock at this time.
- Having KO and NVDA in the portfolio, from a risk perspective, is an illustration of how to structure a portfolio for high risk adjusted returns to maximize the wealth you generate over your lifetime.
- KO is an example of the strategy of buying a great company when it is temporarily hit due to market misperception. Members of The Arora Report had an opportunity to buy KO stock at a cheap price when KO was hit in sympathy with Pepsi (PEP). PEP was hit on concerns of the impact of weight loss drugs. Of course, as a member of The Arora Report, you knew that Pepsi has a very large snack business. For KO, the snack business is not important. This simple piece of knowledge provided an opportunity to buy KO at a good price. Note, PEP stock has not done well, but KO stock has done superbly. PEP stock is not in The Arora Report portfolio.
- Members of The Arora Report get to diversify by strategies – The Arora Report uses over 50 different strategies. The easiest way to diversify by strategies is to follow the Model Portfolios and other signals. Diversification by strategies gives investors a big edge. Diversification by strategies is unique to The Arora Report.
- The chart shows that volume is on the high side during KO’s rise. This indicates conviction.
- RSI on the chart shows that KO is overbought. Overbought stocks tend to pullback. The pullback is often a buying opportunity. There will be a post in ZYX Buy with a new buy zone for those not in KO stock.
- On August 30, just before the recent drop in NVDA stock, the Arora call was to add to NVDA hedge. So far, that call has proven spot on.
- The Arora Report members had some idea of what was coming Nvidia’s way yesterday morning before the market open. We wrote in the Morning Capsule:
In the early trade, stocks are being sold on concern about the carry trade. In a carry trade, investors borrow in yen to invest in stocks in the U.S., primarily in AI stocks.
- NVDA stock has fallen for two reasons:
- Concern about the carry trade
- It appears that there may have been a leak about the U.S. government sending subpoenas to Nvidia and other companies as part of an antitrust probe.
- Here is another example of properly diversifying a portfolio. As NVDA stock falls on concerns about the carry trade, the yen ETF position represented by FXY in ZYX Allocation benefits if carry trade blows up.
- In yesterday’s Morning Capsule we wrote:
ISM Manufacturing Index will be released at 10am ET and may be market moving.
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The consensus is 47.5.
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The prevailing wisdom among smart money is that a weaker number will mean weaker earnings and thus it will be negative for the stock market.
- ISM Manufacturing Index came at 47.2 vs. 47.5 consensus. This weaker number triggered smart money selling as The Arora Report had predicted. In addition to the concern about carry trade, this ISM data was the real reason for the stock market sell off yesterday.
- JOLTS job opening data will be released at 10am ET and may be market moving.
- The Fed’s Beige Book will be released at 2pm ET and may also be market moving.
- In the early trade, there is selling in anticipation of the momo crowd getting margin calls. Adding to the selling pressure is that momo crowd accounts that focus only on buying call options on AI stocks such as NVDA are suffering very heavy losses.
- 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. The protection band is one of the large number of unique edges that are available to members of The Arora Report.
Magnificent Seven Money Flows
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 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 *** in the early trade. (Smart money sold yesterday near the top.)
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.
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
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 (BTC.USD) is seeing selling.
Markets
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 and bonds are range bound.
The dollar is weaker.
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 $2519, silver futures are at $28.42, and oil futures are at $69.90.
S&P 500 futures are trading at 5523 as of this writing. S&P 500 futures resistance levels are 5622, 5748, and 5926: support levels are 5500, 5400, and 5256.
DJIA futures are down 4 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.
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.
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.
