By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Market Mechanics Surprise
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 a sell-off yesterday.
- The chart shows the sell-off brought the stock market below the low band of the resistance zone.
- The chart shows that this morning the stock market is rallying again in the early trade and is back to the low band of the resistance zone.
- The chart shows that RSI was very overbought, and thus the stock market was vulnerable to a sell-off when a surprise occurred in market mechanics.
- As we have been sharing with you, several market mechanics have been driving the stock market up. One of those market mechanics is 0DTE options. Every day traders have been aggressively buying 0DTE calls. Every day when the market started going up, market makers were forced to buy stocks to hedge the calls they had sold.
- During the rally, market makers were more than happy to sell puts to investors as every day puts expired worthless, resulting in market makers making huge profits. As the rally continued, market makers stopped hedging the puts they were selling. After all, there was no point in hedging because the stock market went up every day.
- In yesterday’s Afternoon Capsule, we shared with you that the Treasury auction was weak.
- The weak Treasury auction caused the stock market to turn down. Market makers were caught flat footed as they had sold lots of puts without hedging. As the market went down, market makers were forced to sell stocks to hedge the puts they had sold.
- The result of the surprise encountered by market makers was they were forced to sell stocks to hedge, causing the biggest sell-off since September.
- The sell-off came just before the traditional Santa Claus rally.
- Traditionally, the Santa Claus rally starts tomorrow.
- The sell-off yesterday illustrates why it is so important for all investors to deeply understand market mechanics. Due to their very high value, Wall Street professionals keep the secrets of market mechanics close to the chest, making it difficult for most investors to understand market mechanics even when they try. To help you, we have made it easy for you to know, understand, and apply Wall Street’s best kept secrets. There are several podcasts in Arora Ambassador Club. You can join the exclusive Arora Ambassador Club by invitation only.
- We have been receiving a large number of questions from our very smart members trying to figure out what caused Powell’s flip that resulted in a massive stock market rally. After all, Powell and the Fed had the same data two weeks before the flip when they were very hawkish. We had previously shared with you that on the surface the answer was in the dot plot. Our members are asking what was the real reason behind the switch in the dot plot. When you connect the data points, the real reason becomes clear. Please listen to the podcast titled “Protect Yourself: The Dirty Secret Of The President And The Fed” to understand the real reason behind Powell’s flip.
- 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.
Jobless Claims
Weekly Initial Claims came at 205K vs. 218K consensus. Weekly Initial Claims is a leading indicator and carries heavy weight in our adaptive ZYX Asset Allocation Model with inputs in ten categories. In plain English, adaptiveness means that the model changes itself with market conditions. Please click here to see how this is achieved. One of the reasons behind The Arora Report’s unrivaled performance in both bull and bear markets is the adaptiveness of the model. Most models on Wall Street are static. They work for a while and then stop working when market conditions change.
This indicates that the jobs picture is very strong. More importantly, this data does not support the consensus in the market of six rate cuts next year.
GDP
Q3 GDP-third estimate came at 4.9% vs. 5.2% consensus. This indicates that the economy is strong even though the data is somewhat weaker than the consensus. Keep in mind that this is a lagging indicator. The Arora Report system focuses on leading indicators.
Magnificent Seven Money Flows
In the early trade, money flows are positive in Amazon (AMZN), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG), Meta (META), Tesla (TSLA), and Apple (AAPL).
In the early trade, money flows are positive 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.
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 buying on the hopes that whales will take advantage of the low liquidity over the weekend and run up bitcoin.
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 are ticking down, and bonds are ticking up.
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 $2054, silver futures are at $24.56, and oil futures are at $72.91.
S&P 500 futures are trading at 4784 as of this writing. S&P 500 futures resistance levels are 4826, 4918, and 5020: support levels are 4713, 4600, and 4460.
DJIA futures are up 208 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 seven 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.
