WEEKLY STOCK MARKET DIGEST: AGGRESSIVE STOCK BUYING BY 200-DAY MOVING AVERAGE BELIEVERS, KEY ISM SERVICES DATA

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By Nigam Arora & Dr. Natasha Arora

Weekly Digest from The Arora Report is popular among serious investors and money managers because they have found studying insights from the prior week gives them an edge over the coming weeks. Here is the day by day rundown from the morning capsules made available every morning before the market open in the Real Time Feeds to the paying subscribers of The Arora Report

Please scroll down for the section ‘Protection Bands and What To Do Now.’

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

Editor’s Note: ISM Services Data came better than expected leading to a rally on Friday.  The Morning Capsule was provided before the data was released.

AGGRESSIVE STOCK BUYING BY 200-DAY MOVING AVERAGE BELIEVERS, KEY ISM SERVICES DATA AHEAD

Key ISM Data Ahead

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 200-day moving average drawn in yellow.
  • The chart shows that the stock market bounced strongly from the 200-day moving average.
  • There are legions of investors, who buy and sell based on the 200-day moving average. By itself, there is nothing special about 200 days. Why not 150 days or 250 days?  The 200-day moving average derives its power from the simple fact that a very large number of investors believe in it.  As a result of the belief, buying and selling based on the 200-day moving average becomes a self-fulfilling prophecy.   
  • Often, the believers are oblivious to market mechanics, news, economic data, fundamentals, and macro.
  • Here is what happened:
    • The market had broken the key level of 3950 in S&P 500 futures and was consolidating close to the 200-day moving average.
    • 200-day moving average believers were on high alert because they wanted to sell if the stock market broke below the 200-day moving average or buy if the stock market bounced.
    • Fed’s Bostic gave a speech that had the words “25 basis points” and “slowing.”
    • Right now, many Wall Street algos are designed for machines to buy stocks without human review if algos find the words 25 basis points or slowing in the statement of a Fed official and other criteria.
    • Wall Street algos directed machines to buy stocks within milliseconds of Bostic’s statement.
    • As the stock market started moving up, the  0DTE crowd jumped in aggressively. The 0DTE crowd has now become an important crowd.  Investors should pay attention to 0DTE crowd to get a better grasp on the stock market.
    • Aggressive call buying by the 0DTE crowd further pushed the stock market higher.
    • As the stock market started showing a bounce from the 200-day moving average on the charts, 200-day believers jumped in with aggressive buying.
    • Of course, the most powerful force in the stock market these days is the momo crowd.  Momo crowd buying became more aggressive as the stock market moved up.
  • The irony of all of this buying is that any sane person reading Bostic’s entire statement would not find a reason to buy stocks based on Bostic’s statement.  Yet, Bostic’s statement triggered buying leading to 0DTE buying, 0DTE buying leading to 200 day believer buying and momo crowd buying because the stock market was moving up.
    • Please read yesterday’s Afternoon Capsule for important information on Bostic’s statement. Please click here for the intraday chart showing the reaction to Bostic’s statement.
    • The vast majority of the 200-day believers are totally oblivious to what happened, yet they were putting their money on the line based on the magical power of the 200-day moving average.
  • Later on, Fed’s Waller spoke, and he was very hawkish. The stock market totally ignored Waller.  The stock market was simply too euphoric on buying the 200-day moving average bounce.
  • Fed speak from Logan, Bostic, and Bowman is ahead.
  • The foregoing shows that the stock market does not necessarily move based on a logical analysis of what Fed officials say.  Market mechanics take over. 
  • Looking ahead, ISM Services Index will be released at 10am ET.  The expectation is 54.5 vs. the last reading of 55.2.
    • You may recall from the Capsules that the stock market fell on Wednesday after the prices paid component of ISM Manufacturing Index came hotter than expected.
    • Prudent inventors will be paying close attention to the prices paid component of ISM Services Index.
    • ISM data has the potential to be a market moving event.
  • The 10-year Treasury yield has pulled back to 3.985% as of this writing.  Due to the pullback in the yield, there is aggressive buying in the early trade in tech stocks and junk stocks.

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

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

Last night, whales dumped billions of dollars of bitcoin.  Mom and pop, who recently bought bitcoin because of whale’s propaganda that bitcoin was going to go to $32,000, are now left holding the bag.  Interestingly, bitcoin held up yesterday during the day, in spite of Silvergate (SI) news. From yesterday’s Morning Capsule:

Silvergate (SI), the bank that lent to crypto companies, said that it needed more time to assess the impact of losses from its loans to crypto companies including whether the bank is viable.  The authorities have been trying to isolate cryptos from the banking system.  The good news is that the major banks are safe because they did not get deeply involved in cryptos.  Nonetheless, investors should keep a close eye on SI stock as an indicator.

Bitcoin should have fallen significantly on SI news, but bitcoin is being held up because it trades on the whims of the whales and not based on market forces.

Markets

Our very, very short-term early stock market indicator is 🔒 as it will depend on ISM and Fed speak, but expect the market to open strongly higher on 200-day moving average buying.  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.

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Gold futures are at $1853, silver futures are at $21.18, and oil futures are at $76.73.

S&P 500 futures are trading at 4009  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 152 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.

 

HOTTER EUROZONE INFLATION, MONEY SUPPLY FALLS THE MOST EVER, CONCERN OVER CRYPTO CONTAGION

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

Money Supply

Please click here for a chart of the M2 money supply.

Note the following:

  • The chart shows the M2 money supply is now falling after a rapid rise.  Nobel Prize winning economist Milton Friedman famously said that inflation is a monetary phenomenon. M2 money supply just fell the most ever on record year-over-year.  However, take a look at the chart; the fall is barely visible.  
  • The M2 stands at $21.27T.  It is $6T or 39% above where it stood before the pandemic.
  • In The Arora Report analysis, the money supply level is simply too high relative to the size of the U.S. economy.  All you have to do is take a look at the chart; it does not take a genius to understand that there is inflation.  Further, the chart shows that there is a long way to go to reduce  the money supply to bring it to a reasonable level.
  • The rise in the money supply, in part, caused the stock market to boom. Assuming that the Fed has the backbone to continue reducing the money supply, what will it do to the stock market?  Momo gurus have the answer – it does not matter.  However, prudent investors know better. There are significant consequences for investors over the next several years.  Please refer to the live event held in December titled “A Forward Look At Investing 2023 – 2030.”  If you did not get an opportunity to attend the live event, a recording is available in the Arora Ambassador Club.
  • Inflation data in the eurozone came hotter than expected.  Headline inflation came at 8.5% vs. 8.2% consensus. However, momo gurus are dismissing this data and calling it bullish because in the prior month inflation was at 8.6%, and this month it is down by 0.1%. Should momo gurus be applying flawed logic to eurozone core inflation in addition to the headline inflation?  Of course not, because the data goes against their narrative. Core inflation came at 5.6% vs. 5.3% in the prior month.
  • Investors need to pay attention to inflation in Europe because the U.S. is not isolated from Europe.
  • In yesterday’s Morning Capsule, we alerted you that ISM Manufacturing Index was ahead.  In yesterday’s Afternoon Capsule, we shared with you that the prices paid component of the ISM index was roiling the markets.  Please read yesterday’s Afternoon Capsule for details.
  • ISM prices paid component continues to roil the markets this morning in the U.S.
    •  ISM prices paid was a trigger for another move up in the 10-year Treasury yield.  The 10-year Treasury yield has risen to 4.07% as of this writing.
  • There is a new concern about crypto contagion.  Please see the bitcoin section below.
  • Do not let a quick look at DJIA fool you this morning. A big move up in Salesforce (CRM) stock is adding about 175 points to DJIA.  DJIA futures are up 32 points.  Without the CRM move, DJIA would have been down 138 points. S&P 500 futures have fallen below the key level of 3950.  Nasdaq futures have fallen below the key level of 11,900.

Jobless Claims

Initial jobless claims came at 190K vs. 197K consensus.  This is a leading indicator and carries heavy weight in the adaptive ZYX Asset Allocation Model with inputs in 10 categories.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 stocks in the early trade.  Smart money is 🔒 stocks in the early trade.

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

Silvergate (SI), the bank that lent to crypto companies, said that it needed more time to assess the impact of losses from its loans to crypto companies including whether the bank is viable.  The authorities have been trying to isolate cryptos from the banking system.  The good news is that the major banks are safe because they did not get deeply involved in cryptos.  Nonetheless, investors should keep a close eye on SI stock as an indicator.

Bitcoin should have fallen significantly on SI news, but bitcoin is being held up because it trades on the whims of the whales and not based on market forces.

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.

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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.

Gold futures are at $1838, silver futures are at $20.89, and oil futures are at $77.73.

S&P 500 futures are trading at 3935  as of this writing.  S&P 500 futures resistance levels are 3950, 4000, and 4318: support levels are 3860, 3770, and 3630.

DJIA futures are up 32 points.

 

OPTIMISM ON THE BEST CHINA PMI IN A DECADE GIVES IN TO CONCERNS ABOUT ISM DATA

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

Best PMI In A Decade

Please click here for a chart of China large-cap ETF FXI.

Note the following:

  • Here is an important takeaway for dollar-based investors from China PMI.  As China opens, there will be more demand for oil and other commodities.  This will increase price pressures across the globe, including in the U.S.  This flies in the face of the momo gurus’ narrative to buy stocks because inflation will go down in a straight line.
  • The chart shows a big move in Hong Kong stocks in November, December, and January on the prospects of China opening.
  • The chart shows a pullback in February.  Such pullbacks are common to relieve overbought conditions.
  • The chart shows a strong upmove overnight on PMI data.
  • There is optimism on the best China Manufacturing PMI in a decade.
    • Manufacturing PMI came at 52.6 vs. 50.5 consensus.
    • Non-manufacturing PMI came at 56.3 vs. 55.0 consensus.
    • A number above 50 is considered economic expansion.
  • Stocks in Asia and Europe are higher on China PMI.
  • ISM Manufacturing Index will be released at 10am ET.  This data has the potential to move the markets.
  • The concern about the ISM data has brought selling into the strength generated by China PMI.  Without the excellent China PMI number, this morning the stock market would have likely been down several hundred DJIA points.
  • Today is the first day of the month.  Blind money flows into Wall Street on the first two days of the month.  Buying based on blind money inflows typically occurs in the afternoons.  Blind money is the money that is sent to Wall Street without any analysis and irrespective of market conditions.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 stocks in the early trade.  Smart money is 🔒 in the early trade.

Gold

The momo crowd is 🔒 stocks 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

There has been aggressive buying in crypto exchange Coinbase (COIN) stock.  There is also aggressive buying in bitcoin this morning.  We previously shared with you that this is the most bullish week of the year for bitcoin.

Markets

Our very, very short-term early stock market indicator will depend on ISM data.  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 up, and bonds are ticking down.

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 $1842, silver futures are at $21.08, and oil futures are at $76.58.

S&P 500 futures are trading at 3964  as of this writing.  S&P 500 futures resistance levels are 4000, 4200, and 4318: support levels are 3950, 3860, and 3770.

DJIA futures are down 76 points.

 

WATCH WHAT INVESTORS ARE DOING NOT SAYING, UNEXPECTED INFLATION RISE IN FRANCE AND SPAIN – ECB

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

Investor Sentiment

Please click here for a chart of healthcare select sector SPDR fund ETF XLV.

Note the following:

  • The momo crowd follows momo gurus.  Among other observations, prudent investors pay attention to what investors are doing, not just saying.  After all, talk is cheap.
  • Healthcare is a defensive sector. With the exception of elective procedures, people fall sick and go to doctors both during times of economic boom and during recessions.
  • The chart is a weekly chart to give you a longer term perspective of healthcare stocks.  The chart shows persistent selling week after week.
  • RSI on the chart shows that the healthcare sector is now extremely oversold.
  • What is causing persistent selling in healthcare stocks to make them extremely oversold?  Is it that people are no longer falling sick?  The reason behind persistent selling is that investor sentiment is bullish – investors do not want to own defensive stocks. Healthcare stocks are recession resistant, but right now, investors’ actions show that they believe there will not be a recession or even a soft landing – investors’ actions are assuming no landing.  Please see prior Morning Capsules about various types of landings.  For Arora Ambassador Club members, there are several podcasts that shed light on the subject.
  • Money is flowing out of healthcare into junk stocks, cryptos, consumer discretionary stocks, industrial stocks, and technology stocks.  This investor behavior is loosening financial conditions.  Paradoxically, looser financial conditions mean the Fed may have to raise rates higher and keep them high longer.
  • The momo crowd is assuming that inflation is going to go down in a straight line, but prudent investors know better. This morning there is a lesson for the momo crowd from France and Spain.
    • Inflation in France came at 7.2% year-over-year, up from 7% in the prior month.  This is a record for France.
    • Monthly inflation in France unexpectedly increased from 0.4% to 0.9%.
    • Inflation in Spain came at 7.7% year-over-year, increasing from the prior 7.5%.
    • On a monthly basis, inflation in Spain unexpectedly rose from -0.2% to 0.7%.
  • This data is going to put pressure on the European Central Bank (ECB) to raise interest rates higher.
  • The takeaway for prudent investors is that going forward, there will be unexpected surprises in inflation both to the downside and to the upside.  Your portfolio along with the protection band needs to be structured to handle both unexpected scenarios. 
See also  WEEKLY STOCK MARKET DIGEST: PRUDENT INVESTORS BALANCING OPPORTUNITY FROM AI FRENZY WITH RISKS IN THIS MARKET

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 stocks in the early trade.  Smart money is 🔒 in the early trade.

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

Historically for bitcoin, this is the most bullish week of the year over the last 12 years.

Let us see if whales try to run up bitcoin this week.

Bitcoin is range bound this morning.

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 up, and bonds are ticking down.

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 $1820, silver futures are at $20.78, and oil futures are at $77.46.

S&P 500 futures are trading at 3995  as of this writing.  S&P 500 futures resistance levels are 4000, 4200, and 4318: support levels are 3950, 3860, and 3770.

DJIA futures are up 24 points.

 

EXPLOSIVE GROWTH IN ZERO-DAY OPTIONS MAKE IT DIFFICULT FOR STOCK MARKET BEARS

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 🔒 in the early trade.  Smart money is 🔒 in the early trade.

Gold

The weaker dollar is bringing 🔒 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.

 

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Picture of 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.

Picture of 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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