By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Wipe Out Some Momos
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 the drop in the stock market after the Fed decision yesterday.
- The chart shows the drop yesterday was on higher volume. This indicates conviction.
- Yesterday was the biggest drop after the Fed decision since 2001.
- Now, the Dow Jones Industrial Average (DJIA) has been down for ten days in a row. This is the longest losing streak since 1974.
- Wall Street’s fear gauge VIX experienced the second largest one day rise ever.
- The market was clearly surprised by the hawkish Fed cut, but of course, as a member of The Arora Report, you had advance notice. The title of the Morning Capsule on December 13 read “MORNING CAPSULE: HAWKISH FED RATE CUT AHEAD, BOLD AI PREDICTION FOR 2027.”
- As we have been sharing with you, sentiment is at extreme positive.
- Remember, extreme positive sentiment is a contrary signal. It is a sell signal. It is worth reminding, sentiment is not a precise timing indicator.
- When sentiment is extreme positive, there is a risk to the market for a selloff. All it needs is a trigger. It is akin to a lot of dry tinder building up on the forest floor. It builds up until there is a spark that causes a fire. In this extreme positive market, the spark came yesterday in the form of the hawkish rate cut.
- Quad witching is tomorrow. In quadruple witching, stock index futures, futures options, stock options, and single stock futures expire. Quadruple witching often leads to volatility.
- Tomorrow is the biggest ever option expiration.
- Among expiring options there are ten calls for every one put. Calls disproportionately have strike prices higher than where the market is trading now. If the market does not go higher than where it was before the drop on the hawkish cut, the calls will expire worthless.
- Market makers who sold the calls will come out ahead if the calls expire worthless. Market makers are going to try to do everything they can to put a lid on the market rising over the next two sessions, so the calls expire worthless.
- The momo crowd has been buying these calls aggressively. Some momos have their entire accounts in out of money calls. If the market does not rise by tomorrow, these accounts will be completely wiped out.
- The momo crowd has been trained to buy the dip. Starting at 3:45pm ET yesterday, the momo crowd started aggressively buying the dip. The aggressive buying continued in the after market and is continuing in the premarket this morning.
- In contrast to market makers, the momo crowd wants the market to go higher so that their call options do not expire worthless. If the momo crowd starts becoming halfway successful in pushing the market higher, market makers will be forced to hedge their position by buying the underlying stocks. This is what leads to a squeeze in the market to the upside. The easiest way to develop a deeper understanding of these market mechanics is to listen to the podcasts in Arora Ambassador Club.
- Just released GDP data shows that the economy was stronger in the last quarter than expected. Here are the details:
- Q3 GDP Third Estimate came at 3.1% vs. 2.8% consensus.
- GDP Deflator Third Estimate came at 1.9% vs. 1.9% consensus.
- Initial jobless claims came at 220K vs. 237K consensus.
- Personal incoming and spending as well as PCE will be released tomorrow at 8:30am ET and may be market moving.
- University of Michigan Consumer Sentiment will be released tomorrow at 10am ET and may be market moving.
- 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. The protection band is one of the large number of unique edges that are available to members of The Arora Report.
Japan
The Bank of Japan left rates unchanged. This is helping crypto because investors have been borrowing in yen and buying cryptos.
England
The Bank of England decided to leave interest rates unchanged in light of “heightened uncertainty.”
Magnificent Seven Money Flows
In the early trade, money flows are positive in Amazon (AMZN), Alphabet (GOOG), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA).
In the early trade, money flows are negative in Apple (AAPL).
In the early trade, money flows are neutral 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 *** 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.
Very Very Short-Term Indicator
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.
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
Bitcoin (BTC.USD) is range bound.
Markets
Interest rates are ticking up, and bonds are ticking down.
The dollar is weaker after a strong run up yesterday.
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 5982 as of this writing. S&P 500 futures resistance levels are 6017, 6131, and 6256: support levels are 5926, 5748, and 5622.
DJIA futures are up 335 points.
Gold futures are at $2609, silver futures are at $29,53, and oil futures are at $70.51.
Protection Band And What To Do Now
It is important for investors to look ahead and not in the rearview mirror. The proprietary protection band from The Arora Report is very popular. The 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.
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.
