WALL STREET WAKES UP AND BLAMES MARKET MECHANICS FOR THE STOCK MARKET SELL OFF

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By Nigam Arora & Dr. Natasha Arora

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

Market Mechanics

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 when The Arora Report gave a signal to raise hedges.
  • The chart shows that so far in August, aggressive buying by the momo crowd is failing to run up the stock market.
  • Wall Street is finally waking up and blaming market mechanics for the sell off.  0DTE options are being singled out for the sell offs that occur late in the day.
  • As an Arora Report member, you knew in advance that market mechanics were changing and a sell off may ensue, at least temporarily.  From the Morning Capsule from The Arora Report dated August 14:

In a separate development, for the first time in 2023, market makers are gamma hedged.  This is a major development, and prudent investors should pay attention.  The reason is that about two thirds of the magnitude of the stock market rally in 2023 is attributable to market mechanics.  One of the market mechanics that has helped the stock market run up is short gamma squeeze.  For those who want to understand this deeply, there is a new podcast titled “Market Mechanics: Impact Of Dealers’ Gamma Position Change On The Stock Market” in post production.  The podcast will be available in Arora Ambassador Club.  The club has several other podcasts to help you understand market mechanics in-depth.

  • In plain English this means that some of the fuel that led to the stock market rise this year is now spent.

  • It is especially noteworthy that Wall Street knew that market mechanics were responsible, in large part, for the rally this year but never expressed that as long as the stock market was rising.  Now that the stock market has pulled back slightly, they are blaming market mechanics.
  • We have been sharing with you data in the Morning Capsules showing strong consumer spending.  Since the U.S. economy is 70% consumer based, consumer spending is very important.  Consumers have been flush with cash from government programs and as a result, developed habits of excessive spending.  Of course, you know that the government financed these programs with heavy borrowing.
  • It looks like an important prior call from The Arora Report may prove to be spot on – the call was that consumers would run out of excess savings by October.  Now the call is getting support from research from the Federal Bank of San Francisco.  The report says that consumers held less than $190B in excess savings in June and the savings are likely to be exhausted by the end of September. 
  • Of special note is that earnings from Walmart (WMT) are better than the consensus.
  • Yields on long term bonds across the globe are rising after Federal Reserve minutes released yesterday.  Please read the Afternoon Capsule for details.
  • 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.
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Jobless Claims

Initial jobless came at 239K vs. 240K consensus.

This 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.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Tesla (TSLA), Nvidia (NVDA), Alphabet (GOOG), Apple (AAPL), and Amazon (AMZN).

In the early trade, money flows are negative in Microsoft (MSFT) and Meta (META).

In the early trade, money flows are mixed 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) has fallen below $29,000.

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.

See also  WEEKLY STOCK MARKET DIGEST: PRUDENT INVESTORS PAY ATTENTION TO CHANGE IN REACTIONS IN THE STOCK MARKET

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

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 $1932, silver futures are at $22.99, and oil futures are at $80.52.

S&P 500 futures are trading at 4431 as of this writing.  S&P 500 futures resistance levels are 4460, 4600, and 4713: support levels are 4400, 4318, and 4200.

DJIA futures are up 47 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.

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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.

To take a free 30-day trial to paid services to gain access to more opportunities, please click here.

This post was just published on ZYX Buy Change Alert.

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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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