WEEKLY STOCK MARKET DIGEST: OPTION EXPIRATION RALLY SAVES THE STOCK MARKET BUT WHAT IS NEXT?

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By Nigam Arora & Dr. Natasha Arora

Weekly Digest from The Arora Report is popular among serious investors and money managers because they have found studying insights from the prior week gives them an edge over the coming weeks. Here is the day by day rundown from the morning capsules made available every morning before the market open in the Real Time Feeds to the paying subscribers of The Arora Report

Please scroll down for the section ‘Protection Bands and What To Do Now.’

CHINA MOVE AND FAILED DOLLAR BREAKOUT MAY SAVE THE STOCK MARKET

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

Dollar And China Moves

Please click here for a chart of the U. S. Dollar Index Bullish Fund (UUP).

Note the following:

  • In the early trading, sentiment has turned positive and stocks are being bought on the China move.
  • China has cut its five-year loan prime rate to 4.45% from 4.6%.
    • The rate cut is 0.15% vs. consensus of 0.1%
    • This is the largest rate cut since 2019.
  • This larger than expected rate cut by the People’s Bank of China sparked a rally in China. The positive sentiment from China carried over to the rest of Asia, then to Europe, and now to the U. S.
  • The chart shows a relentless rise in the dollar.
  • The relentless rise in the dollar is due to the Fed turning hawkish.
  • A large number of companies in popular indexes such as DJIA, &P 500, and Nasdaq 100 derive a significant percentage of their revenues from overseas.   When the dollar rises, this negatively impacts the earnings of such companies.
  • The relentless rise in the dollar is, in part, responsible for the current swoon in the U. S. stock market.
  • In our ZYX Asset Allocation Model, there are inputs in 10 crucial categories. Please click here to see the details. One of the crucial inputs is currency moves.
  • The chart shows a breakout in the dollar.
  • The RSI on the chart showed a divergence on the breakout. In plain English, this means that as the price went up, RSI went down.
  • RSI divergence foretold that the breakout might fail.
  • The chart shows that at least for the time being, the dollar breakout has failed.
  • We have a large number of indicators that we analyze to see if a bottom has been reached in the stock market. At this time, currency movements are important indicators.
  • The failed breakout in the dollar is a positive for the U. S. stock market. Remember that there are many factors at play and this is only one of them.
  • There is a fair probability that the drop in the dollar is temporary.

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 range-bound.

Markets

Our very, very short-term early stock market indicator is 🔒 but expect the market to open up strongly. Also, remember that this is a Friday. Friday has two cross currents. If the market starts going up, short squeezes occur exaggerating the up move.  If the market starts going down, funds that do not want to take the risk of holding their highly leveraged positions over the weekend start selling exaggerating the down move.  There is also option expiration today, this will add to the volatility. 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 slightly stronger for the day.

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 $1839, silver futures are at $21.78, and oil futures are at $109.85.

S&P 500 futures resistance levels are 3950, 4000, and 4200: support levels are 3860, 3770, and 3630.

DJIA futures are up 216 points.

Protection Bands and What To Do Now?

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold 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.

 

BULLS AND BEARS BOTH POINT TO DOUBLE ISLAND REVERSAL IN THE MARKET, BULLISH SIGNAL FROM BITCOIN

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

Double Island Reversal

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 quasi double island reversal.
  • Both bulls and bears are using this rare double island reversal to make their case.
  • In a classic island, the low would have been higher on both days marked on the chart.
  • For this reason, this is not exactly a classic double island reversal, and we have dubbed it a quasi double island reversal.
  • An island reversal is typically a reversal pattern. In plain English, this means that if the market is going down, it is expected to go up after an island reversal. For this reason, bulls are hanging their hat on the double island reversal.
  • The chart shows that the market did not exactly go up after either island. In our analysis, for this reason, the bearish interpretation carries more weight. The bearish interpretation is that the double island reversal failed, and thus there is more downside in the medium term.
  • The chart shows that early this morning, the market came close to the top of the support zone.
  • There are likely a large number of stops right under the top band of the support zone. Putting stops at such an obvious place is like putting your cash in the middle of the street where everyone can see it for the purpose of protecting your cash. Unfortunately, gurus continue to teach this way of putting stops and investors continue to get burned.
  • It is common for hunt and destroy algorithms employed by smarter traders to take out these stops. Typically, once these stops are taken out, the market bounces.
  • Bulls are making a case that the chart is forming a double bottom.
  • Yesterday, about 93% of the volume was to the downside. In traditional technical analysis, this is considered a sign of a bottom.
  • In our analysis, 93% down volume should be ignored because the overall volume, as shown on the chart, was not heavy.  
  • There is no change in our prior call:

ZYX Global Allocation Model is now showing a 60% probability of the stock market eventually hitting the lower support zone shown on the chart.

  • It is also important to note the following integral parts of the prior call:

Do not expect a straight line down.

Expect many strong rallies.

Jobless Claims

See also  UNPRECEDENTED BANK OF ENGLAND INTERVENTION RESCUES MOMO CROWD AFTER APPLE RUINS THE RALLY

Weekly initial claims came at 218K vs. 200K consensus.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 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 giving a bullish signal for itself and also for the stock market.

  • Bitcoin held up well yesterday during the big market slide.
  • Bitcoin has held the support.
  • Even though stock futures are down, bitcoin is moving higher.
  • Stock bulls are hanging their hat on the bullish signal from the stock market emanating from bitcoin.
  • Here is the key question: do you want to buy stocks based on a signal from bitcoin?

Markets

Our very, very short-term early stock market indicator is 🔒 and can easily swing either way. 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 $1829, silver futures are at $21.65, and oil futures are $104.88.

S&P 500 futures resistance levels are 3950, 4000 and 4200: support levels are 3860, 3770 and 3630.

DJIA futures are down 338 points.

 

INVESTORS PAY ATTENTION: TARGET BUSTS THE BULLISH MYTH

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

The Bullish Myth

Please click here for a chart of Target (TGT).

Note the following:

  • The Morning Capsule is about the big picture and not about individual stocks. The chart of TGT is being used to illustrate the larger point.
  • Until now, the bullish case for stocks has been that non-working class consumers were not pushing back against higher prices.
  • Target earnings show that the bullish case is a myth. The myth is now busted.
  • TGT attracts more affluent customers relative to Walmart (WMT).
  • Here are the key points from TGT earnings.
    • Target’s revenue rose to $25.17B vs. $24.49B consensus.  In spite of higher revenues excluding items, earnings came at $2.19 vs. $3.07 consensus.  
    • Earnings fell 41% from the year ago period.
    • Target is overstaffed.
    • Target has too much inventory but the wrong kind.
    • First it was Amazon (AMZN), then it was WMT, and now it is TGT.
    • AMZN and WMT earnings short falls were explained away. Please see yesterday’s Morning Capsule regarding Walmart’s earnings.
  • With the benefit of hindsight, the way AMZN and WMT provided the information, it was misleading. Now there is no more putting lipstick on this pig – the consumer is resisting higher prices.
  • The implication is that earnings are going to go down and so should the stock market.
  • The chart shows about 24% drop in TGT stock on earnings.
  • This kind of drop following the drop in WMT yesterday is highly unusual and indicates how much froth was built up not only in speculative stocks and technology stocks but also in non-tech blue chips that were considered safe until yesterday.
  • The chart shows the pre-pandemic high.
  • Wall Street is creating a new narrative to persuade investors to keep buying stocks. The new narrative is that after TGT earnings, growth stocks look good, and it is now time to buy tech stocks.  
  • Let us stay neutral and observe if the new narrative starts working or if it fails.
  • Even though Wall Street is ignoring hawkish comments from Powell yesterday, prudent investors are well advised to pay attention. Please see yesterday’s Afternoon Capsule for the key points of Powell’s comments.
  • Pay attention to the “Protection Bands And What To Do Now” section below.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 stocks in the early trade. Smart money is 🔒 stocks 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 draw from strategic petroleum reserves was supposed to increase oil inventory. However, API data showed a draw of 2.445M barrels vs. a consensus of a build of 1.533M barrels.

EIA data will be released at 10:30am ET and is considered more authoritative.

See also  INFLATION HOTTER THAN EXPECTATIONS – SMART MONEY SELLS – MOMO GURUS WRONG AGAIN

The momo crowd is 🔒 oil in the early trade. Smart money is 🔒 oil in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin has fallen below $30,000 in correlation with selling in aggressive speculative stocks.

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 up, and bonds are ticking down.

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 $1809, silver futures are at $21.59, and oil futures are $111.36.

S&P 500 futures resistance levels are 4200, 4318 and 4400: support levels are 4000, 3950 and 3860.

DJIA futures are down 281 points.

 

INVESTORS PAY ATTENTION TO STRATEGIC VS. TACTICAL CALLS, RISK ON SENTIMENT

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

Hedges

Short term hedges have become very profitable. Be prepared to reduce them if the risk on sentiment continues. We will publish a post on new hedge levels as appropriate.

Risk On Sentiment

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:

  • Shanghai is slowly returning to normal. This caused risk on sentiment in Asia.
  • The risk on sentiment from Asia moved on to Europe and then to the United States in a round robin fashion.
  • The chart shows that the market has moved above the top band of the resistant/support zone.
    • Those following traditional technical analysis and ignoring the macro picture are getting a buy signal.
  • The momo crowd is aggressively buying as they already believe the bottom is in.
  • Two important earnings were released this morning.
    • Home Depot (HD) earnings were very strong. Home renovations have not slowed in spite of rising interest rates.
    • Walmart (WMT) earnings were weak. Walmart says the consumers are down shifting to lower priced generic brands from name brands and from buying one gallon of milk to a half gallon of milk. Walmart also said that spending is up on expensive items such as patio furniture.
    • In our analysis at The Arora Report, the difference is that the people who own houses feel rich because house prices have gone up and they are spending. Working class people who do not own houses are being hurt by inflation.
  • Investors need to pay attention to retail sales because the United States economy is 70% consumer based. Here are the details of the latest data:
    • Retail Sales came at 0.9% vs. 0.9% consensus. Of significant interest is that the prior number is being revised to 1.4% from 0.5%.
    • Retail Sales ex-auto came at 0.6% vs. 0.3% consensus. Of significant interest is that the prior number is being revised to 2.1% from 1.1%.
    • In our analysis at The Arora Report, the consumer continues to spend, but the consumer is now beginning to borrow more on credit cards.

Strategic Vs. Tactical

All investors should consider bringing more sophistication to their investing and trading. It is important to clearly understand the difference between strategic and tactical calls.

From a strategic point of view, the market environment is negative.

From a tactical point of view, the market environment has turned from negative to neutral/mild positive.

Under such an environment, aggressive investors can start new positions as they fall into the buy zones, but be prepared to not hold them for the long term and take profits quickly.

Conservative investors may consider waiting before starting new long term positions.

Growth investors fall in between conservative and aggressive investors. Growth investors may want to be selective.

The two sections below will help you understand the difference between strategic and tactical calls.

Strategy

Strategy defines medium to long term plan to achieve the highest risk-adjusted returns.

Here are some examples of strategic calls for illustration only.

  • It is late cycle. Portfolios have to be organized for the late-cycle. Risks are much higher in the late-cycle compared to when a bull market is in an early stage.
  • The world is awash in debt. The sovereign debt owed by governments and corporate debt owed by zombie corporations has dramatically increased. It is a bubble that is getting bigger waiting for a pin to prick it.
  • Valuations are expensive.
  • Fed policy is shifting.
  • Earnings are rising.

Tactics

Tactics are small adjustments within the strategy to further enhance risk-adjusted returns.

Here are some examples of tactical calls.

  • Weak hands temporarily washed out.
  • Overbought condition temporarily relieved.
  • Sentiment backing off from almost extreme bullish levels.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 stocks in the early trade. Smart money is 🔒 stocks 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

The risk on sentiment in stocks is only partially transferring to 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 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 $1831, silver futures are at $21.74, and oil futures are $114.43.

S&P 500 futures resistance levels are 4200, 4318 and 4400: support levels are 4000, 3950 and 3860.

DJIA futures are up 414 points.

 

60% PROBABILITY OF THE MARKET HITTING THE LOWER SUPPORT ZONE, UGLY CHINA DATA

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

Not Mother Of Support Zones

Please click here for a chart of S&P 500 ETF (SPY) which represents the benchmark stock market index S&P 500 (SPX).

See also  DOLLAR FALLS ON UKRAINE NEWS – BUYING IN STOCKS, GOLD, AND OIL ON LOWER DOLLAR

Note the following:

  • ZYX Global Allocation Model is now showing a 60% probability of the stock market eventually hitting the lower support zone shown on the chart.
    • Please click here to see the 10 categories of inputs into the model.
    • ZYX Global Allocation Model is an adaptive model.  In plain English, this means that the model changes itself in response to market conditions.  Please click here for details.  Most of the models used on Wall Street are static models.  Static models tend to work for a while and then stop working when market conditions change.  Due to its adaptiveness, ZYX Global Allocation Model has worked well in both bull and bear markets for a very long time.
  • The lower support zone is marked as “NOT MOTHER OF SUPPORT ZONES” on the chart. The context is that when the stock market was falling out of bed at the beginning of the pandemic, The Arora Report provided investors with a chart showing “MOTHER OF SUPPORT ZONES.”  The stock market fell to the top band of the mother of support zones and then bounced.  Please click here for the chart of the mother of support zones and how it helped investors as the zone held.
    • The implication is that in the analysis at The Arora Report, the probability was extremely high that the mother of support zones would hold, and this is why it was called the mother of support zones. Not mother of support zones means that it is a strong support zone but not a very strong support zone.
  • Do not expect a straight line down.
  • Expect many strong rallies.
  • The reason the probability of the market eventually going lower has gone up is that the data shows that the probability of recession and/or stagflation has gone up.
    • It is extremely important that investors increase their knowledge of stagflation now and get ahead of the curve.
  • The stock market experienced a very strong rally on Friday. Bulls are expecting a follow-through rally and believe that the stock market low for the cycle is in. Bears contend that the rally that started Friday was simply a bear market rally.
  • Investors should consider not getting locked into the bearish or bullish camp. Consider following Arora’s Third Law of Investing and Trading, “Making investing and trading decisions based on probabilities is the only realistic and profitable approach.”
  • For the short term, advancing versus declining volume on Friday was about 90%, which is positive. On the negative side, as the chart shows, total volume was not high.
  • For the short term, the chart shows that the market is now in the resistance/support zone. The market will have to decisively breakout of this zone for bulls to establish their case.

Ugly China Data

The economic data released in China last night was ugly.

  • There is always a question about reliability of data from China.
  • It stands to reason that the Chinese government would want the data to look better than it is and certainly would not manipulate the data to look worse than it is.
  • Retail sales fell 11.1% versus a consensus of a fall of 6.6%.
  • Industrial production came at -2.9% versus +0.5% consensus. This is the worse data since 1990.
  • Jobless rate came at 6.1% versus 6.0% consensus.  This is the highest rate since February 2020.
  • Property investment saw its first decline since February 2020.
  • The consensus numbers take into account the lockdowns. Nobody expected the data to be as bad as it is.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 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 🔒 gold 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 fluctuating around $30,000.  Bulls contend that bitcoin has bottomed.  Bears contend that it is going below $21,000.

Markets

Our very, very short-term early stock market indicator is 🔒 due to noise in the data.  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 slightly 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 $1806, silver futures are at $41.25, and oil futures are $110.12.

S&P 500 futures resistance levels are 4200, 4318, and 4400 : support levels are 4000, 3950, and 3860.

DJIA futures are down 28 points.

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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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