WALL STREET IS FRONT RUNNING REBALANCING LEADING TO A RALLY IN THE STOCK MARKET

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By Nigam Arora & Dr. Natasha Arora

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

Quarter End Rebalancing

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 compares SPY with NASDAQ 100 ETF QQQ and bond ETF TLT.
  • The chart shows that so far in this quarter QQQ has lost 24.57%, SPY has lost 19.91%, and TLT has lost 14.74%.
  • In quarter end rebalancing, investors will sell bonds and buy stocks. This is an age old tradition. The argument is that stocks should be bought because they have gone down more than bonds.
  • Wall Street is front running the rebalancing.
  • The market has been very oversold.  As the market moves up, the momo crowd is buying, believing that the bottom is in. Of note is that the momo crowd has called the bottom dozens of times so far this year, only to see the market go lower.
  • If the market moves further, there is potential for a vicious short squeeze.
  • As a full disclosure, a signal was given for super aggressive investors on Friday before the big rally that is occurring to buy triple leveraged ETF TQQQ as a short term trade.  In the early trade, the TQQQ trade is profitable.
  • Over the long weekend, there have been many warnings of a potential severe recession.  At the same time, permabulls are claiming that a recession can be avoided.
  • The sum total of the foregoing as an action item is in the Protection Bands And What To Do Now section below.

Momo Crowd And Smart Money In Stocks

The momo crowd is aggressively buying stocks in the early trade.  Smart money is inactive in the early trade.

Gold

The momo crowd is buying gold in the early trade.  Smart money is inactive in the early trade.

For longer-term, please see gold and silver ratings.

Oil

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

For longer-term, please see oil ratings.

Bitcoin

Over the weekend, bitcoin dipped below $18,000.  This was a big blow to bitcoin bulls as they were counting on the support at $20,000 holding.

There are unverified rumors that when bitcoin dipped Binance, a large crypto exchange, and other exchanges bought billions of dollars worth of bitcoin to prevent bitcoin from going into a freefall. As the price started moving up, dip buyers jumped in hoping that the bottom was in.  As bitcoin moved above $20,000, it started a vicious short squeeze.

Markets

Our very, very short-term early stock market indicator is positive.  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 $1839, silver futures are at $21.72, and oil futures are $110.07.

S&P 500 futures resistance levels are 3770, 3860 and 3950: support levels are 3630, 3600 and 3520.

DJIA futures are up 429 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 26% – 40% in cash or treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 12% – 15%, and short term hedges of 8% – 14%. 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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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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