WEEKLY STOCK MARKET DIGEST: ECONOMIC DATA TEMPERS AI FRENZY BUYING IN THE STOCK MARKET

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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.’

$2.4 TRILLION OF OPTIONS EXPIRATION ON TOP OF NASDAQ 100 REBALANCING MAY CAUSE VOLATILITY

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

Nasdaq Rebalancing

Please click here for a chart of Nasdaq 100 ETF (QQQ).

Note the following:

  • From a long term perspective, the chart shows that QQQ is way over stretched to the upside compared to the 200 day moving average shown in yellow.  
  • The chart shows that QQQ has hit the low band of the resistance zone and has slightly pulled back after hitting the low band.
  • The chart shows that QQQ is still above the trendline.
  • The chart shows the slope of the trendline is now less than it was earlier when QQQ broke out of the support zone shown on the chart.
  • From a short term perspective, RSI on the chart shows that QQQ has moved rapidly from a severe overbought condition to not overbought.
  • Nasdaq 100 rebalancing will be effective as of Monday, July 24.
  • Here are the weight changes of the magnificent seven stocks in Nasdaq 100 rebalancing:
    • Apple (AAPL) will be reduced from 12.06% to 11.05%.
    • Microsoft (MSFT) will be reduced from 12.74% to 9.80%.
    • Alphabet (GOOG) will be reduced from 7.61% to 5.70%.
    • Amazon (AMZN) will be reduced from 6.91% to 5.30%.
    • Nvidia (NVDA) will be reduced from 7.28% to 4.30%.
    • Meta (META) will be reduced from 4.46% to 3.70%.
    • Tesla (TSLA) will be reduced from 4.44% to 3.40%.
  • Change in weight from the magnificent seven will be distributed to other stocks in the index.  Here are the top beneficiaries:
    • Broadcom (AVGO) goes up from 2.36% to 3.00%.
    • Pepsi (PEP) goes up from 1.65% to 2.10%.
    • Costco (COST) goes up from 1.58% to 2.00%.
    • Adobe (ADBE) goes up from 1.49% to 1.90%.
    • Cisco (CSCO) goes up from 1.34% to 1.70%.
    • Netflix (NFLX) goes up from 1.26% to 1.60%.
  • In theory, on the surface it seems that there should be selling in the magnificent seven stocks, but there are counterpoints.
    • As popular as Nasdaq 100 is, there is relatively little long term money tied to Nasdaq 100.  Most long term money is tied to S&P 500.  SPY is the most popular S&P 500 ETF.
    • QQQ is the second most liquid ETF, trading about $13B each day.  However, money in QQQ tends to be short term.
    • The Wall Street consensus is that investors should buy the magnificent seven stocks on any dip caused by rebalancing.
    • Lately, investors have been front running events on the buy side.
    • Investors are lined up to quickly buy even the slightest dip in the magnificent seven stocks.
  • In addition to the special rebalancing, the waters are muddied by $2.4T of options expiration.
  • Options expiration appears to be to the upside.  There appears to be buying pressure in the magnificent seven stocks arising from options expiration.  This counters the selling pressure in the magnificent seven from rebalancing.
  • Prudent investors need to keep in mind that market mechanics have mostly taken over, and a majority of the rise in the stock market lately has been due to market mechanics.  Investors can gain an edge by understanding market mechanics.  There are several podcasts on market mechanics in Arora Ambassador Club.
  • In the early trade, investors are buying TSLA and NFLX to take advantage of yesterday’s drop in these two stocks on earnings.
  • American Express (AXP) stock is being sold on earnings.  AXP is a component of the Dow Jones Industrial Average.
  • As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

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

Bitcoin is below $30,000.

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 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 $1965, silver futures are at $24.92, and oil futures are at $76.58.

S&P 500 futures are trading at 4587  as of this writing.  S&P 500 futures resistance levels are 4600, 4713, and 4770: support levels are 4460, 4400, and 4318.

DJIA futures are up 103 points.

Protection Band 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.

See also  WEEKLY STOCK MARKET DIGEST: PRUDENT INVESTORS STAY ALERT, AI FRENZY TAKES CONTROL OF THE STOCK 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.

 

REACTION TO TESLA AND NETFLIX EARNINGS, WARNING FROM BIGGEST CHIP MANUFACTURER

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

Important Earnings

Please click here for a chart of Tesla stocks (TSLA).

Note the following:

  • The Morning Capsule is about the big picture, not an individual stock.  The chart of TSLA stock is being used to illustrate the point.
  • We previously wrote in yesterday’s Afternoon Capsule:
  • Investors are eagerly waiting for earnings from TSLA, IBM, and NFLX after hours.

  • The key for prudent investors will be if the momo crowd continues the pattern of ignoring the bad news in the earnings reports and buying on hope of better times ahead.

  • In the early trade, the momo crowd  is not reacting to Tesla, IBM (IBM), and Netflix (NFLX) earnings as momo gurus expected.
  • The chart shows the gap down on Tesla earnings.
  • The chart shows a RSI divergence that correctly foreshadowed the dip on earnings.  In plain English, divergence means that RSI went down as price went up.
  • Both Tesla revenues and earnings were above the whisper numbers.  Whisper numbers were higher than the consensus numbers.
  • In The Arora Report analysis, looking under the hood, here are the important points about Tesla earnings:
    • The beat on earnings was mostly due to a large non-operating gain. 
    • Free cash flow was below consensus. 
    • Auto gross margin was 70 bps below consensus in spite of benefits from IRA credits.
    • Tesla will likely need to lower prices even further to generate the demand.
  • Most analysts are upgrading Tesla stock based on these earnings.
  • In addition to the earnings and revenue numbers, here are the key points that investors should be mindful of:
    • Musk sees a clear path to increase the value of TSLA stock by 5 – 10 times.
    • Musk believes that significant additional value will be created by autonomy.
    • Tesla is in talks with a major OEM to license FSD.
    • Tesla is open to licensing FSD.
    • Tesla expects to use both Nvidia (NVDA) and Dojo.
    • Tesla expects 100 times more training data for AI over the next 1.5 years.
  • NFLX stock is falling in the early trade as third quarter revenue projections are below consensus and overall, the earnings report is below the whisper numbers.
  • IBM earnings were in line with whisper numbers, but in spite of the AI hype, the stock is not moving higher in the early trade.
  • Prudent investors should pay attention to an important development.  Taiwan Semiconductor (TSM) is guiding Q3 revenue of $16.7B – $17.5B vs. $17.68B consensus.  TSM is the largest manufacturer of sophisticated chips and is a supplier to Apple (AAPL) and Nvidia.
  • In The Arora Report analysis, TSM projections should send a warning to the momo crowd that the demand for semiconductors is likely to be weaker in spite of the large total demand for AI applications.
  • For a tell, prudent investors should keep an eye on how the seven magnificent stocks react. The magnificent seven stocks are Apple (AAPL), Amazon (AMZN), Alphabet (GOOG, GOOGL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA).
  • As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

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 🔒 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 has moved over $30,000.

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 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 $1977, silver futures are at $25.32, and oil futures are at $75.81.

S&P 500 futures are trading at 4580 as of this writing.  S&P 500 futures resistance levels are 4600, 4713, and 4770: support levels are 4460, 4400, and 4318.

DJIA futures are down 8 points.

 

MOMO CROWD REACTS TO EARNINGS BY IGNORING THE BAD AND BUYING ON HOPE

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

Ignoring The Bad

Please click here for a chart of Charles Schwab stock (SCHW).

Note the following:

  • The Morning Capsule is about the big picture, not an individual stock.  The chart of SCHW is being used to illustrate the point.
  • The chart shows that SCHW stock fell during the banking crisis in March 2023.
  • There was no danger of Schwab going bankrupt like Silicon Valley Bank.  Schwab is an excellent company.  The reason the stock fell in March was that the momo crowd finally figured out what prudent investors already knew.  Schwab made a lot of money by paying zero or near zero interest to customers for cash in their accounts while it earned interest on that cash for itself.  Investors were rapidly moving their money to earn interest.  This was going to reduce  Schwab’s earnings.
  • As shown on the chart, the fall in SCHW stock illustrates what happens when the momo crowd discovers something negative that was already well known.
  • Yesterday, SCHW reported earnings in the premarket.  Earnings were mixed.
  • Initially, the stock traded around unchanged for a while in the premarket.  Then the stock took off and opened higher in the regular session as shown by the chart.
  • In the end, SCHW closed up 12.57% and is higher in the premarket as shown on the chart.
  • The reaction to Schwab’s earnings illustrates that the momo crowd is buying on hope that future earnings will be better, and they are ignoring the negatives in the reported earnings.  This applies to not only Schwab, but all the earnings reported so far this quarter.  
  • The foregoing shows that investors have become complacent about the reality, and sentiment is playing a big role in buying.
  • Let us see how investors react to more earnings as they come in.  This morning Goldman Sachs (GS) reported earnings.  So far in the premarket, investors are buying on hope, and as a result, the stock has fallen only 1.5% even though there are a lot of negatives in the earnings.
  • Important earnings from Tesla (TSLA), Netflix (NFLX), and IBM (IBM) will be reported after the market close.  How investors react to these earnings will be a tell.
  • Investors should also carefully watch Microsoft (MSFT) stock.  As we wrote in the Afternoon Capsule, MSFT stock was rocketing on Microsoft pricing its AI Copilot for Office 365 at $30 per month.  We previously wrote:

The very aggressive pricing from MSFT is in line with our expectations.  However, it is significantly higher than market estimates.

  • Microsoft’s announcement accelerated the AI frenzy, and the positive sentiment from the AI frenzy carried through to Apple (AAPL), Meta (META), Nvidia (NVDA), and Alphabet (GOOG).
  • As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.
See also  WEEKLY STOCK MARKET DIGEST: WILL EXCITEMENT IN THE STOCK MARKET THAT DROVE S&P 500 TO ALL TIME HIGHS CONTINUE?

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

API crude oil inventories came at a draw of 0.797M barrels vs. a consensus of a draw of 2.25M 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 is staying below $30,000 as of this writing.

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 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 $1980, silver futures are at $25.33, and oil futures are at $76.30.

S&P 500 futures are trading at 4590  as of this writing.  S&P 500 futures resistance levels are 4600, 4713, and 4770: support levels are 4460, 4400, and 4318.

DJIA futures are up 40 points.

 

RETAIL SALES FALTER, INVESTORS RUSHING INTO HIGH BETA STOCKS

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

Rushing Into High Beta Stocks

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 compares SPY to high beta ETF SPHB and low volatility ETF SPLV.
    • High beta stocks are those that move a lot and are considered risky.
    • Low volatility stocks are those that do not move a lot and are considered safer.
  • The chart shows that investors have been rushing out of the safe stocks as SPLV has fallen 2.04%.
  • The chart shows that investors have been rushing into risky stocks as SPHB has gone up 27.82% for the year.
  • Outperformance of 29.86% by SPHB over SPLV is remarkable.  It indicates high risk appetite, very positive sentiment, disregard for risk, and major obliviousness to the headwinds.
  • The trigger behind investors rushing fearlessly into high beta stocks is the AI frenzy. 
  • The U.S. economy is about 70% consumer based.  Therefore, prudent investors pay attention to retail sales.  The data just released show that retail sales are beginning to falter after a long consumer buying binge that helped the stock market.  Here are the details:
    • Headline retail sales came at 0.2% vs. 0.5% consensus.
    • Retail sales ex-auto came at 0.2% vs. 0.3% consensus.
    • Momo gurus are out in full force promoting the false narrative that the new numbers are as expected (they clearly are not) and they don’t matter anyway because the stock market is going to keep going up.  These are the same gurus, who for the last three years, were giving robust retail sales as one of the reasons to buy stocks.
    • Retail sales faltering is especially noteworthy in view of investors rushing into high beta stocks.
  • Among the big banks, earnings from BAC and MS are slightly better than expected.  Earnings from PNC are worse than expected.  Earnings from SCHW are mixed, but investors are rushing into the stock anyway.

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

For longer-term, please see oil ratings.

Bitcoin

Bitcoin has fallen below $30,000.

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 range bound.

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 $1970, silver futures are at $25.09, and oil futures are at $74.12.

S&P 500 futures are trading at 4547  as of this writing.  S&P 500 futures resistance levels are 4600, 4713, and 4770: support levels are 4460, 4400, and 4318.

See also  INFLATION HOTTER THAN EXPECTED BUT MOMO GURUS HAVE A NEW NARRATIVE TO BUY STOCKS

DJIA futures are down 26 points.

 

MOMO GURUS PREDICT DEMISE OF DOLLAR BULL RUN, CHINA DATA TEMPERS ENTHUSIASM FOR STOCKS

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

Dollar Predictions

Please click here for a chart of Dollar Index Bullish Fund (UUP).

Note the following:

  • The chart shows that the dollar has dropped recently into the support zone.
  • The chorus of momo guru predictions that the dollar bull run has ended is picking up steam again.  Keep in mind that momo gurus tend to be perma dollar bears for several reasons.
    • Stories of the dollar’s demise generate high viewership on television, high page views on the internet, and large subscription sign ups for newsletters.
    • Momo gurus’ job is to run up the stock market.  Stories of the dollar’s demise help the stock market in the short term.
  • Momo gurus have been predicting the dollar’s demise and have been consistently wrong, but this time there is good reason to be concerned about the dollar. The reason is that currencies move based on relative interest rates. The Fed is mostly done raising interest rates.  Even the most aggressive predictions for Fed rate hikes are for two more hikes.  The European Central Bank is behind the Fed in reaching the terminal rate and so is the Bank of Japan.
  • S&P 500 companies derive significant revenue from overseas. When overseas profits are converted into dollars, the profits go up when the dollar is weaker.  For this reason, a weak dollar helps the stock market go up in the short term.
  • In the long term, a weaker dollar is not good for the U.S.  A strong currency is the hallmark of a strong country.
  • Nobody is talking about the impact of a weaker dollar on inflation in the U.S., but prudent investors should pay attention.  Have you ever tried to buy consumer goods made in the U.S.?  The U.S. is a large importer, especially of consumer goods from China.  A weaker dollar causes the cost of imports to go up.
  • Historically, the biggest beneficiary of a weaker dollar is emerging markets.  Investors may want to consider slowly increasing their allocation to emerging markets.  Please see the “Accelerating Wealth Generation” section of the Trade Management Guidelines. Growth is in emerging markets, but it is important to be selective.  ZYX Emerging has continuously covered 14 emerging markets for 16 years.
  • The bullish enthusiasm for stocks is being slightly tempered this morning by economic data from China.  GDP grew by 6.3% year-over-year vs. 7.1% consensus.  However, below the surface, the news is actually good if you look at quarter-over-quarter instead of year-over-year.  Q2 GDP grew 0.8% quarter-over-quarter vs. 0.5% consensus.  Prudent investors should pay attention to quarter-over-quarter data even though the stock market is paying attention to year-over-year data.  The reason is that year-over-year data is stale.  
  • The deluge of earnings will start tomorrow.
  • Money flows in the magnificent seven stocks are mixed.  This is a departure from the usual positive money flows in the magnificent seven stocks.  However, this may change as the day progresses.  Expect retail investors to be buying the magnificent seven stocks based on pumping in the media over the weekend.   The magnificent seven stocks are Apple (AAPL), Amazon (AMZN), Alphabet (GOOG, GOOGL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA).
  • As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

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

There is disappointment that whales did not run up bitcoin over the weekend.

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 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 $1952, silver futures are at $24.91, and oil futures are at $74.46.

S&P 500 futures are trading at 4534 as of this writing.  S&P 500 futures resistance levels are 4600, 4713, and 4770: support levels are 4460, 4400, and 4318.

DJIA futures are down 70 points.

 

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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.

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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