By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Recession Probability
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 that the stock market has pulled back after touching the low band of the mini resistance zone.
- The chart shows that the stock market is consolidating slightly above the top support zone.
- RSI on the chart shows that the stock market is neither overbought nor oversold and can go in either direction from here.
- Powell’s speech at Jackson Hole was about as expected.
- This AI frenzy driven market was mostly focused on Nvidia (NVDA) earnings. Please see prior capsules. Now that Nvidia earnings are behind, the stock market is focused on momo gurus’ narrative of no recession, the recession probability is zero, and the economy is heading toward no landing.
- As we have been sharing with you, lately the economic data has been very strong. A recession has clearly been postponed for two reasons.
- The consumer has continued to spend aggressively. Consumer savings went up during the pandemic due to free money and other government programs. This led to excessive consumer spending. The consumer has had difficulty changing the habit of excessive spending.
- Lower income households have now run down their savings and are maintaining their spending by borrowing.
- Higher income households own stocks and houses. They continue to spend because they feel richer as the AI frenzy has run up the stock market and house prices have held up due to lack of supply. Since most homeowners with a mortgage have interest rates locked in below 4%, no one wants to sell their house as new mortgage rates are over 7%.
- Excessive government borrowing and spending continues from the Inflation Reduction Act and the Infrastructure Act. Government spending is providing more stimulus to the economy than anticipated.
- The consumer has continued to spend aggressively. Consumer savings went up during the pandemic due to free money and other government programs. This led to excessive consumer spending. The consumer has had difficulty changing the habit of excessive spending.
- Start with Arora’s Second Law of Investing and Trading. The second law states, “Nobody knows with certainty what is going to happen next in the markets.” Follow with Arora’s Third Law of Investing and Trading, which states “Making investing and trading decisions based on probabilities is the only realistic and profitable approach.”
- In The Arora Report analysis, the following are the probabilities going forward:
- Recession 45%
- Soft landing 35%
- No landing 20%
- It is important for investors to keep in mind that the stock market is priced for no landing and zero percent probability of a recession.
- The other important dynamic in the stock market is that a large number of investors now believe that a recession, interest rates, and the Fed do not matter due to investors’ enthusiasm for AI.
- Since so many members have been asking for a podcast on Nvidia and wanting to understand deeply why it dropped in spite of extraordinary blowout earnings, you will be delighted to know that the podcast titled “Understanding Over-Ownership Gives You An Edge – King Nvidia Example“ is in post production and will be published soon. Thank you for your emails requesting an invitation to join Arora Ambassador Club. Arora Ambassador Club is not currently accepting new members.
- 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.
China
We have been sharing with you that the Chinese government has been trying very hard to prop up its stock market. The Chinese government cut the tax on stock trading for the first time since the great financial crash of 2008. The CSI 300, the main index of Mainland Chinese stocks, jumped 5.5% at first, but then the gains started fading. Investors should take note that everytime the Chinese government tries to prop up the stock market, the stock market first jumps and then gives up most of the gains.
In The Arora Report analysis, the reason the rallies are not sustained is that the economic data in China is weak.
Magnificent Seven Money Flows
In the early trade, money flows are positive in Amazon (AMZN), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG), Meta (META), Tesla (TSLA), and Apple (AAPL).
In the early trade, money flows are mixed 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 🔒 stocks in the early trade.
Gold
The momo crowd is 🔒 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 (BTC.USD) is range bound.
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 $1944, silver futures are at $24.21, and oil futures are at $79.93.
S&P 500 futures are trading at 4432 as of this writing. S&P 500 futures resistance levels are 4460, 4600, and 4713: support levels are 4400, 4318, and 4200.
DJIA futures are up 161 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.
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.
