By Nigam Arora & Dr. Natasha Arora
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 🔒 (To see the locked content, please take a 30 day free trial) 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.
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.
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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.
