By Nigam Arora
To gain an edge, this is what you need to know today.
Deploy Cash
High momentum AI stocks have dipped 30% – 60%. You may recall that previously when Wall Street was uber bullish on these high momentum AI stocks, The Arora Report call was to expect a 30% – 50% drop. That call has been spot on. Now is the time to start slowly deploying cash in the AI trade. The tentative plan is to also take profits on hedges or reduce hedges in due course as new data comes in. Please see the Arora Protection Band for the immediate change. The tentative plan is to continue reducing cash, assuming the new data is supportive.
Having said the foregoing, the markets are extremely volatile and the risks that were outlined in yesterday’s Morning Capsule have not gone away. As a result, investors should also be prepared for about a 30% probability at this time that the plan to deploy cash and reduce hedges may need to be reversed. Start with Arora’s Second Law of Investing and Trading, which states, “Nobody knows with certainty what is going to happen next in the markets,” and follow with Arora’s Third Law, which states, “Making investing and trading decisions based on probabilities is the only realistic and profitable approach.”
60% Of Capitulation Criteria Met
Please click here for a chart of leveraged semiconductor ETF (SOXL).
Note the following:
- Semiconductors reflect the AI trade, and SOXL is the momo crowd’s favorite.
- The chart shows SOXL has fallen below the low band of zone 3 (support). On the surface, the break below support is a negative. However, in The Arora Report method, investors need to look at the breakdown in conjunction with RSI and the volume.
- The chart shows divergence in RSI since RSI hit the absolute low of 0.0. In plain English this means that RSI has gone higher as the price of SOXL has gone lower. This is a positive.
- The chart shows heavy volume yesterday when SOXL fell below the low band of zone 3. The heavy volume indicates conviction in selling. On the surface, this seems negative. However, in The Arora Report method, investors also need to look at it in the context of margin calls that were hitting momo crowd accounts yesterday and heavy short selling that our algorithms picked up. The correct interpretation in the proper context is that immediate selling due to forced liquidations in momo crowd accounts may not be as intense today as it was yesterday. Short selling again may not be as intense as it was yesterday. The net result is that heavy volume in this context is positive, not negative as it seems on the surface.
- In The Arora Report analysis, heavy short selling yesterday increases the probability of a short squeeze that can lead the stock market higher. Here is the highest probability scenario sequence:
- Short sellers will likely first push the pedal hard to drive the market lower.
- If the market starts going higher, short sellers are likely to panic and buy to cover.
- Once short sellers begin to cover, it will drive the market even higher. Those who follow traditional technical analysis see the momentum and jump in, driving the market even higher.
- The foregoing scenario may play out over a few days. Today is a Friday. Historically, short squeezes start on Fridays.
- There is no guarantee that the above scenario will play out. The point is the above scenario is the highest probability scenario at this time.
- In The Arora Report analysis, about 60% of the criteria for capitulation in high momentum AI stocks have been met. Investors who understand the secrets of capitulation gain a big edge. For those who want to gain the big edge, the podcast titled “THE TEN SECRETS OF EPIC CAPITULATION RICHES” is available in Arora Ambassador Club.
- It is worth a reminder that you do not get to invest and trade in the market you wish you had; you get to invest and trade in the market you are given. Certainly, it would be easier if 80% – 90% of capitulation criteria was met so that a signal to back up the truck and buy stocks, like The Arora Report did on March 9, 2009 after the Arora Protection Band was at 100% during the entire 2008 crash. With the benefit of hindsight, March 9, 2009 was the start of a long bull market.
- In The Arora Report analysis, the best practical way to handle the market as it is now is to slowly deploy cash in the AI trade.
- The risks outlined in yesterday’s Morning Capsule regarding Iran, the midterm elections, and President Putin’s success should not be underestimated. Having said that, as a member of The Arora Report, you are ahead of the curve.
- The headline of today’s Wall Street Journal reads “Iran Threatens Wider Strikes on Economic and Civilian Targets if U.S. Attacks.“
- One day before the Wall Street Journal headline, The Arora Report Morning Capsule published before the market open had “Iran doctrine shift” in the headline. We wrote:
Iran’s Islamic Revolutionary Guard Corps (IRGC) spokesman Hossein Mohebi is saying that IRGC is shifting to an “offensive and asymmetrical” defense doctrine. In plain English this means that Iran will proactively attack U.S. bases, other countries, and oil tankers in its defense.
- University of Michigan consumer sentiment 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 neutral in Apple (AAPL), Nvidia (NVDA), and Tesla (TSLA).
In the early trade, money flows are negative in Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOG), and Meta (META).
In the early trade, money flows are negative 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.
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 ***. 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 *** in 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
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 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.
S&P 500 futures are trading at 7666 as of this writing. S&P 500 futures resistance levels are 7733, 7795, and 7831 : support levels are 7626, 7541, and 7318.
DJIA futures are down 452 points.
Gold futures are at $4041, silver futures are at $53.88, and oil futures are at $101.27.
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.
