By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Zero-Day Options Explosive Growth
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 on Thursday and Friday, the market closed well above the low of the day. The primary reason was aggressive buying of zero-day call options.
- Zero-day options expire the same day.
- Zero-day options are seeing explosive growth. By some estimates, they are reaching a notional value of $1 trillion.
- In The Arora Report analysis, if it was not for aggressive buying of zero-day call options, the stock market would have fallen at least to the algo selling line shown in red on the chart.
- For many retail traders, zero-day options are replacing meme stocks, cryptos, penny stocks, and junk momo stocks.
- Institutional investors are also jumping on the bandwagon big time.
- So far, investors have most aggressively been buying zero-day call options. If investors start aggressively buying put options, the impact on the stock market will be to the downside. However, so far, there is no sign of investors getting aggressive with put options. The reason appears to be that retail investors mostly buy call options, and institutions are piggybacking on the aggressive buying by retail investors.
- A new phenomenon is emerging. There are indications that professional investors are now front running buying of zero-day call options in the premarket and early in the regular session. This appears to be one of the factors running up the stocks in the premarket.
- The momo crowd is also aggressively buying stocks as the momo gurus’ narrative is that the pullback is over, and the stock market is now headed much higher.
- Due to the increasing importance of zero-day options, we have started work on a podcast titled “Market Mechanics: Understand Zero-Day Options To Gain An Edge.”
- It is important for even long term investors to understand zero-day options. The reason is that if the current trends continue, they can permanently bring higher stock valuations simply due to market mechanics.
Durable Goods
Durable goods came at -4.5% vs. -3.9% consensus.
Durable goods ex-transports came at 0.7% vs. 0.1% consensus.
Momo Crowd And Smart Money In Stocks
The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) in the early trade. Smart money is 🔒 in the early trade.
Gold
The weaker dollar is bringing buying in 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 🔒 in the early trade. Smart money is 🔒 in the early trade.
For longer-term, please see oil ratings.
Bitcoin
Bitcoin 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 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.
Gold futures are at $1823, silver futures are at $20.77, and oil futures are at $76.04.
S&P 500 futures are trading at 4008 as of this writing. S&P 500 futures resistance levels are 4200, 4318, and 4400: support levels are 3950, 3860, and 3770.
DJIA futures are up 230 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 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.
