$2.4 TRILLION OF OPTIONS EXPIRATION ON TOP OF NASDAQ 100 REBALANCING MAY CAUSE VOLATILITY

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By Nigam Arora & Dr. Natasha Arora

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

Nasdaq Rebalancing

Please click here for a chart of Nasdaq 100 ETF (QQQ).

Note the following:

  • From a long term perspective, the chart shows that QQQ is way over stretched to the upside compared to the 200 day moving average shown in yellow.  
  • The chart shows that QQQ has hit the low band of the resistance zone and has slightly pulled back after hitting the low band.
  • The chart shows that QQQ is still above the trendline.
  • The chart shows the slope of the trendline is now less than it was earlier when QQQ broke out of the support zone shown on the chart.
  • From a short term perspective, RSI on the chart shows that QQQ has moved rapidly from a severe overbought condition to not overbought.
  • Nasdaq 100 rebalancing will be effective as of Monday, July 24.
  • Here are the weight changes of the magnificent seven stocks in Nasdaq 100 rebalancing:
    • Apple (AAPL) will be reduced from 12.06% to 11.05%.
    • Microsoft (MSFT) will be reduced from 12.74% to 9.80%.
    • Alphabet (GOOG) will be reduced from 7.61% to 5.70%.
    • Amazon (AMZN) will be reduced from 6.91% to 5.30%.
    • Nvidia (NVDA) will be reduced from 7.28% to 4.30%.
    • Meta (META) will be reduced from 4.46% to 3.70%.
    • Tesla (TSLA) will be reduced from 4.44% to 3.40%.
  • Change in weight from the magnificent seven will be distributed to other stocks in the index.  Here are the top beneficiaries:
    • Broadcom (AVGO) goes up from 2.36% to 3.00%.
    • Pepsi (PEP) goes up from 1.65% to 2.10%.
    • Costco (COST) goes up from 1.58% to 2.00%.
    • Adobe (ADBE) goes up from 1.49% to 1.90%.
    • Cisco (CSCO) goes up from 1.34% to 1.70%.
    • Netflix (NFLX) goes up from 1.26% to 1.60%.
  • In theory, on the surface it seems that there should be selling in the magnificent seven stocks, but there are counterpoints.
    • As popular as Nasdaq 100 is, there is relatively little long term money tied to Nasdaq 100.  Most long term money is tied to S&P 500.  SPY is the most popular S&P 500 ETF.
    • QQQ is the second most liquid ETF, trading about $13B each day.  However, money in QQQ tends to be short term.
    • The Wall Street consensus is that investors should buy the magnificent seven stocks on any dip caused by rebalancing.
    • Lately, investors have been front running events on the buy side.
    • Investors are lined up to quickly buy even the slightest dip in the magnificent seven stocks.
  • In addition to the special rebalancing, the waters are muddied by $2.4T of options expiration.
  • Options expiration appears to be to the upside.  There appears to be buying pressure in the magnificent seven stocks arising from options expiration.  This counters the selling pressure in the magnificent seven from rebalancing.
  • Prudent investors need to keep in mind that market mechanics have mostly taken over, and a majority of the rise in the stock market lately has been due to market mechanics.  Investors can gain an edge by understanding market mechanics.  There are several podcasts on market mechanics in Arora Ambassador Club.  Currently, Arora Ambassador Club is not accepting new members.  However, there is a new waitlist.  If you want to be on the waitlist, please fill out the form below.
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  • In the early trade, investors are buying TSLA and NFLX to take advantage of yesterday’s drop in these two stocks on earnings.
  • American Express (AXP) stock is being sold on earnings.  AXP is a component of the Dow Jones Industrial Average.
  • As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

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 is below $30,000.

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.

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

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 $1965, silver futures are at $24.92, and oil futures are at $76.58.

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S&P 500 futures are trading at 4587  as of this writing.  S&P 500 futures resistance levels are 4600, 4713, and 4770: support levels are 4460, 4400, and 4318.

DJIA futures are up 103 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.

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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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This post was just published on ZYX Buy Change Alert.

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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.

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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