By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Change In Market Reaction
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 the stock market has moved above the top band of the support zone.
- RSI on the chart shows the stock market is poised for a rally.
- Even though technically the stock market is poised for a rally, in The Arora Report analysis, the determining factor will be the economic data and earnings that are ahead. This is a data heavy week. All of the following has the potential to significantly move the market:
- Producer Price Index (PPI) will be released tomorrow.
- Consumer Price Index (CPI) will be released on August 14.
- Retail sales will be released on August 15.
- Jobless claims will be released on August 15.
- There are important earnings ahead from Home Depot (HD) and Walmart (WMT). These earnings will give a glimpse of consumer behavior. WMT is in the ZYX Buy Model Portfolio. The position has 255% unrealized gains.
- In The Arora Report analysis, the market reaction to the news has changed. In November 2022, Powell triggered the stock market reaction function of bad news is good news and good news is bad news. This reaction function persisted until mid-July 2024. Starting in mid-July 2024, the market reaction function has changed – good news is good news and bad news is bad news. As a member of The Arora Report, you knew in advance that this change was coming. We have repeatedly written that the prior market reaction function was highly flawed as it counted on bad news leading to rate cuts but did not consider that bad news also negatively impacts earnings. Now, the stock market is understanding the reality and has stopped ignoring the fact that bad news leads to bad earnings.
- Risk and reward are two sides of the same coin in investing. Smart money takes into account both risk and reward. In contrast, the momo crowd takes into account only the reward and ignores the risk. At present, the hopium among the momo crowd is that the upcoming economic data will start a rip roaring rally. However, prudent investors need to keep in mind that there is no guarantee the upcoming data will turn out as the momo crowd is envisioning.
- Another factor prudent investors need to take into account is that the momo crowd does not have the same fire power it had only a week ago. The reason is that the momo crowd suffered heavy losses last week even though the stock market has recovered.
- Due to margin calls, many momo crowd positions were liquidated with heavy losses near the lows last week.
- The momo crowd had heavily bought weekly call options going into last week. Those call options expired worthless on Friday.
- 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 positive in Nvidia (NVDA) and Microsoft (MSFT).
In the early trade, money flows are neutral in Amazon (AMZN), 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.
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 *** in gold in the early trade. Smart money is *** in the early trade.
For longer-term, please see gold and silver ratings.
Oil
Oil is running up on fears of reprisal by Iran.
The momo crowd is *** oil in the early trade. Smart money is *** in the early trade.
For longer-term, please see oil ratings.
Bitcoin
There is disappointment that whales did not run up bitcoin (BTC.USD) over the weekend. As a result, bitcoin has dropped below $60,000 as of this writing.
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 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 $2483, silver futures are at $27.88, and oil futures are at $77.85.
S&P 500 futures are trading at 5382 as of this writing. S&P 500 futures resistance levels are 5400, 5500, and 5622: support levels are 5256, 5210, and 5020.
DJIA futures are up 56 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.
