REDUCE HEDGES – A SURPRISE FROM AUSTRALIA ALIGNS THE STARS FOR A BIG MOMO RALLY

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By Nigam Arora & Dr. Natasha Arora

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

Reduce Hedges

Right now, the range for short term hedges is 🔒.  The range is not being changed, but for some investors who are nimble, there is merit to moving towards the low end of the range especially if there is a pullback.

Such a reduction should be made only with the understanding that the hedges may need to be increased again on October 7, 12, and 13.

  • Jobs report will be released on October 7.
  • Producer Price Index (PPI) will be released on October 12.
  • Consumer Price Index (CPI) will be released on October 13.

Surprise From Australia

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 Reserve Bank of Australia (RBA) raised rates by 25 basis points vs. consensus of 50 basis points.
  • RBA Governor Lowe explained that rates have been raised substantially in a short time.
  • The move by RBA has given more ammunition to the momo gurus for the narrative that the Fed is about to pivot.
    • It is said that a broken clock is right twice a day.  Momo gurus have been like a broken clock. They have been saying from the beginning of the year that the Fed is about to pivot.  The momo gurus have been wrong so far, but sooner or later they will be right, just like a broken clock.
    • Momo gurus being consistently wrong has not stopped their followers from aggressively buying stocks and causing major bear market rallies.
  • The chart shows that if the rally continues, the narrative that a double bottom has formed will gain steam.  A double bottom is a positive pattern.
  • The chart shows that prior to yesterday’s rally, the market approached the high band of “not mother of support zones” but did not breach it.  In traditional technical analysis, this is positive.
  • The chart shows that RSI is now on a buy signal for the short term.
  • The chart shows that yesterday’s rally was not on a heavy volume.  This is a negative.
  • The chart shows that this morning the stock market is closing the down gap formed on September 23.
  • The chart shows that the market is about to meet resistance at the lower band of the support / resistance zone. 
  • Here is how the stars are aligning for the momo gurus’ call for a big rally.
    • History is supportive.  Five of the 14 largest bear market rallies have occurred in October.
    • Historically, the market often runs up going into the midterm elections.
    • Historically, the fourth quarter is the strongest quarter of the year.
    • The relentless strength in the dollar has been a headwind for the market.  The dollar is pulling back.
    • The relentless rising yields have been a headwind for the market.  Yields are pulling back.
  • How aggressive is the momo crowd buying?  You do not need to look any farther than the momo crowd aggressively buying Credit Suisse (CS) stock.  Please read yesterday’s Morning Capsule for details about CS.  
  • In spite of all of the positives given above, the following negatives have not changed.
    • In The Arora Report analysis, the risk of a recession is 75% in 2023.
    • Market crashes tend to occur in October.
    • Powell is very aware of Burns’s blunder.  Please see prior capsules for details.  It is highly unlikely that Powell will error in the direction of repeating Burns’s blunder.
    • So far, Fed speakers are showing no signs of relenting.  If you were to listen to Fed speakers, there is no doubt that there is a disconnect between the Fed’s reality and market’s hope.   
      • We will be paying careful attention to the Fed speak to see if anything changes.
    • In The Arora Report analysis, Wall Street’s earnings estimates are still too high.
  • Looking forward, here are the key points:
    • As is their pattern, expect the momo crowd to buy ahead of the jobs report release on Friday on hope strategy.
    • The earnings season is about to start.  Commentary from the first set of earnings, will set the tone.  Keep in mind that the managements of the companies are incentivized to put the best positive spin they can on earnings.
    • Jobs report will be released on Friday. If the employment picture weakens, there is a potential of a 2% – 5% rally in the stock market.  On the other hand, if the employment picture stays strong, the report will throw cold water on the momo gurus’ narrative, and the stock market can fall by a large amount.
    • PPI will be released on October 12, and CPI will be released on October 13.  Both reports have the potential to cause a 2% – 5% move in the stock market.
  • Please see the oil section below.  If OPEC+ is successful in raising prices, it will be a negative for the market.
  • The sum total of the foregoing is to consider adjusting the hedges or even adjusting your cash levels if you do not hedge, but consider staying within the protection bands.  Make these moves only if you are nimble and understand that you may need to reverse these moves based on the new data that will be forthcoming as written above.
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Heads Up

As a heads up, the call on buy zones and buy now ratings may change to starting short term tactical positions when stocks and ETFs fall into the buy zones.

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

Buying in silver is especially aggressive.  The last time such aggressive buying was seen in silver, it went up 400%. 

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

OPEC+ is meeting tomorrow.  It seems that Saudi Arabia has aligned itself with Russia against the United States.  It appears that OPEC+ is heading towards a major production cut. 

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 seeing buying as it approaches $20,000.

Markets

Our very, very short-term early stock market indicator is 🔒, but expect the market to open up significantly higher and the momo crowd to attempt to run it even higher.  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 significantly weaker.

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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 $1713, silver futures are at $20.86, and oil futures are at $84.81.

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

 futures are up 380 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

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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