By Nigam Arora
To gain an edge, this is what you need to know today.
Extreme Positive 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:
- The chart shows that only five days ago the stock market touched the top band of zone 2 (support).
- The chart shows that since touching zone 2, the stock market has staged a strong rally, driving it to a new high.
- RSI on the chart shows the stock market is now overbought. Overbought markets tend to be vulnerable.
- The chart shows there is buying in the early trade.
- The rally from the top band of zone 2 was triggered by the collapse of the $45B Situational Awareness fund that lost 67% in July. Prudent investors should note that if it was not for the collapse of Situational Awareness, the stock market would likely have continued to go down instead of rallying.
- Prudent investors should also note that the main reason for the rally is a short squeeze. Also aiding the rally are hopium on Iran and good earnings. As good as earnings are, prudent investors need to be careful about the flawed narrative that momo gurus are loudly pumping. We previously wrote:
Prudent investors pay attention. Momo gurus are touting 47% earnings growth this quarter so far this quarter based on reported earnings. In The Arora Report analysis, the headline is highly misleading. The reason is the large gains from equity investments in Amazon and Alphabet (GOOG, GOOGL) earnings need to be excluded to get a true picture. When these equity gains are excluded, the earnings growth this quarter is about 28% vs. 23% consensus. Earnings growth is strong, but nowhere near the misleading number momo gurus are touting.
- In The Arora Report analysis, the short squeeze is likely not done yet. This means the short squeeze can provide more fuel for a rally.
- Iran hopium can also provide more fuel for the stock market rally. However, investors need to be careful about Iran hopium. On one side, there is President Trump trying to find a way out with a sharp eye on the midterm election that is quickly approaching. On the other hand, there is Iran believing it has the upper hand.
- Even though the U.S. is saying there is great progress in talks with Iran, Iran is saying that the U.S. is not part of the negotiations and negotiations are taking place between Iran and Oman.
- Houthis have attacked a Saudi oil tanker in the Red Sea, but as of this writing, the stock market is ignoring it, putting weight on statements from the U.S. that a good deal with Iran is near.
- In The Arora Report analysis, investors should also be careful because stock market sentiment has quickly reached extreme positive. If sentiment had not reached extreme positive so quickly, it would have been easier to start tactical positions from the long side. Extreme positive sentiment is a contrary signal – in plain English this means sell. However, it is important to remember that sentiment is not a precise timing indicator.
- Investors need to look ahead beyond today’s bullishness in the stock market.
- September and October tend to be seasonally weak.
- Most stock market crashes occur in September and October.
- Midterm elections are ahead – historically the stock market goes through a weak period before the midterm election and then rallies after the election.
- Adding to the cross currents is good news for Nvidia (NVDA). Elon Musk’s SpaceX (SPCX) has exclusively chosen Nvidia’s Blackwell architecture. SpaceX will also use Nvidia chips for space data centers. SpaceX is targeting up to 10 GW of compute by 2027. The loser here is Nvidia competitor Advanced Micro Devices (AMD).
- In important earnings, earnings from Eli Lilly (LLY), Disney (DIS), Shopify (SHOP), and Arista Networks (ANET) are above consensus and whisper numbers.
- ADP is the largest payroll processor in the country. ADP uses its data to give an advanced glimpse of the jobs picture before the official jobs report on Friday. ADP employment change came at 44K vs. 75K consensus.
- In The Arora Report analysis, at this time the stock market likes weak employment because if employment is weak, it will be difficult for the Fed to raise rates. Prudent investors need to keep in mind that lately there has not been a good correlation between ADP data and the official U.S. data.
- ISM non-manufacturing index will be released at 10am ET and may be market moving.
- As an actionable item, the sum total of the foregoing is in the Arora Protection Band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the Arora Protection Band. The Arora Protection Band is one of the large number of unique edges that are available to members of The Arora Report.
Magnificent Seven Money Flows
Most portfolios are now heavily concentrated in the Mag 7 stocks. For this reason, to get ahead and get an edge, investors need to dig below the surface of the Mag 7 stocks. It is equally important to rise above the noise of daily news on the Mag 7 stocks. The best way to get an edge, dig below the surface, and rise above the noise of the daily news is to pay attention to early money flows in the Mag 7 stocks on a daily basis. When there is significant news in the Mag 7 stocks that rises above the threshold of noise and impacts your entire portfolio, it is covered in the main section above.
In the early trade, money flows are positive in Amazon (AMZN), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG), and Meta (META).
In the early trade, money flows are neutral in Apple (AAPL).
In the early trade, money flows are negative in Tesla (TSLA).
In the early trade, money flows are positive in S&P 500 ETF (SPY) and neutral 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 *** in the early trade.
Note for new members: Smart money often sells into the strength generated by momo crowd buying and buys into the weakness generated by momo crowd selling. Over a long period of time, investors come out ahead by adopting smart money’s ways. The exception is in a raging bull market – for very short term trades, consider following the momo crowd and not smart money. Smart money is an important indicator but is only one of hundreds of indicators that go into determining the Arora Protection Band and signals. Please click here and here to understand how signals are generated.
Very Very Short-Term Indicator
The Arora Report’s proprietary very, very short-term early stock market indicator is ***. The trajectory of the stock market will depend on the course of the short squeeze. 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.
Gold
The momo crowd is *** gold in the early trade. This is reflected in gold ETF (GLD), silver ETF (SLV), gold miner ETF (GDX), and silver miner ETF (SIL). Smart money is *** in the early trade.
For longer-term, please see gold and silver ratings.
Oil
API crude inventories came at a build of 2.69M barrels vs. a consensus of a draw of 2M barrels.
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
Interest rates and bonds are range bound.
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.
S&P 500 futures are trading at 7803 as of this writing. S&P 500 futures resistance levels are 7900 and 8000 : support levels are 7700, 7318, and 7194.
DJIA futures are up 222 points.
Gold futures are at $4223, silver futures are at $61.95, and oil futures are at $75.94.
Arora Protection Band And What To Do Now
It is important for investors to look ahead and not in the rearview mirror. The proprietary Arora Protection Band from The Arora Report is very popular. The Arora Protection Band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.
Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding *** in cash, Treasury bills, short term fixed income, 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.
A protection band of 0% would be very bullish and would indicate full investment with 0% in cash. A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.
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.
