WEEKLY STOCK MARKET DIGEST: JANUARY EARNINGS FEARS – MOMO STOCK MARKET RALLY RUNS INTO THE FED AND ECB BRICK WALL

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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.’

 

$4 TRILLION OPTIONS EXPIRATION – EARNINGS FEARS

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

$4 Trillion Options Expiration

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

Note the following:

  • Today is quadruple witching. In yesterday’s Afternoon Capsule we shared with you,$4 trillion worth of options are expiring tomorrow.

This is the biggest option expiration in two years.

So far, it appears that the volatility leading to the quadruple witching is contributing to the selloff.

  • Quadruple witching has two parts. The first part occurs in the morning and the second in the afternoon.  The morning part is to the sell side.
  • The chart shows that the breakout attempt failed.
  • The chart shows that at its high in the failed breakout, the market did not reach even the low band of the resistance zone.  This is a negative.
  • The chart shows the market is now approaching the support/resistance zone.
  • RSI is oversold. RSI can easily become more oversold.  On the other hand, since RSI is oversold, if a rally starts, it can be a violent rally.
  • In yesterday’s Afternoon Capsule we shared with you

What happens next between now and close tomorrow will depend on how far market makers are in squaring their positions.

  • It is not known at this time if the market makers are done squaring their positions for the afternoon or not.
  • Some analysts are finally beginning to pay attention that the earnings estimates are too high.  The Arora Report has been sharing with you for several months that Wall Street earnings estimates are too high.  As more analysts understand that earnings estimates are too high, it is also contributing to the selloff.
  • Momo gurus have not given up knowing that seasonality in the second half of December is on their side, they are still going to try to push the market higher.
  • Keep in mind that as we get closer to Christmas, liquidity will drop and it will be easier to push the market around. 
  • Layoffs that have to date been largely confined to the bloated tech sector are coming to Wall Street.  Goldman Sachs (GS) is considering laying off 4000 people.  Morgan Stanley (MS) is cutting 1600 jobs.

China

Covid is rapidly spreading through Beijing.  Beijing has turned into a ghost town.

The rally in Chinese stocks is taking a pause.

Germany

Bundesbank has raised its 2023 CPI forecast to 7.2% from 4.5%.  The Bundesbank has also cut its GDP forecast to -0.5% from +2.4%.

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 🔒 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

Crypto firms have not been able to engage big four accounting firms.  French auditor Mazars has stopped work for Crypto.com  and Binance.

Bitcoin is seeing light selling.

Markets

Our very, very short-term early stock market indicator is 🔒 but can easily swing due to squaring of positions by market makers.  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 $1795, silver futures are at $23.17, and oil futures are at $73.90.

S&P 500 futures resistance levels are 3950, 4000, and 4200: support levels are 3770, 3630, and 3600.

DJIA futures are up/down 385 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.

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

Brick Wall

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 the stock market has decisively turned down after approaching the top band of the support/resistance zone.
  • The chart shows that the volume has been heavier. A failing rally on heavier volume is negative.
  • Investors should keep a close eye on algo selling line shown on the chart.
  • The seasonality is positive in the second half of December, and momo gurus are still determined to run the stock market up to S&P 500 4400 – 4500 before the end of the year.  Considering the rally failed at 4100 as shown on the chart, the probabilities are now as follows:
    • Market going higher 35%
    • Market staying range bound 35%
    • Market falling 30%
  • In The Arora Report analysis, the big concern is that when companies report earnings in January, they may need to lower projections.  
  • As good as momo gurus are in crafting new narratives to persuade their followers to buy stocks, they are running into a brick wall of the Fed and European Central Bank (ECB).
  • Powell was very rational, steadfast, and hawkish.  Powell did not bend to the wishes of the market bulls.  Powell was very careful to make it difficult for momo gurus to twist his words.  Please see yesterday’s Afternoon Capsule for details.
  • Momo gurus are out in full force this morning making a vigorous case that the Fed is wrong, the Fed does not mean what they say, and the Fed will pivot and start cutting rates soon.  Remember, these are the same momo gurus who were consistently saying that the Fed was right when the Fed said there was no inflation. The same momo gurus were also consistently saying that the Fed was right when the Fed moved to saying that inflation was transitory.
  • Do not fall in the trap of not understanding that momo gurus sole job is to run up the stock market in the guise of analysis irrespective of what they privately think.  
  • Please see the section below “Protection Bands And What To Do Now” to account for the lower probability of a year end rally after the hawkishness from the Fed and ECB.

Industrial Production

Industrial Production came at -0.2% vs. 0.1% consensus.

Capacity Utilization came at 79.7% vs. 80.0% consensus.

Eurozone

ECB is hawkish this morning.

  • ECB increased interest rates by 50 basis points.
  • ECB expects to raise interest rates further by a significant amount.
  • ECB says that inflation remains far too high.
  • ECB says that inflation is likely to stay above the target for too long.

UK

Bank of England raised interest rates by 50 basis points.

Switzerland

Swiss National Bank raised interest rates by 50 basis points.

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

Bitcoin is range bound.  So far, whales are successful in keeping bitcoin levitated.  Make no mistake that a handful of whales largely determine where bitcoin goes.

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 $1789, silver futures are at $23.53, and oil futures are at $76.13.

S&P 500 futures resistance levels are 3950, 4000, and 4200: support levels are 3860, 3770, and 3630.

DJIA futures are down 405 points.

 

INDICATION OF THE TERMINAL RATE WILL DRIVE THE STOCK MARKET

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

Terminal Rate

Please click here for a chart of long bond ETF TLT.

Note the following:

  • Investors need to filter out the noise and focus on what is important.  We have repeatedly shared with you that there are three important keys to this market:
    • The terminal rate
    • How long the Fed keeps interest rates at the terminal rate
    • Earnings and earnings projections
  • The foregoing is for the longer term.  In the short term, the momo crowd is often in control.  For this reason, all investors need to pay attention to the momo crowd.
  • The chart shows that TLT has decisively broken the down trendline.
  • The chart shows that TLT is hovering at the support/resistance line.
  • The chart shows that TLT made a higher low.
  • The chart shows that RSI can go either way from here.
  • The sum total of the chart is that yields on long term bonds have fallen.  The net effect is that the PE of the stock market can go higher.
  • Investors need to think of not only PE but also earnings and earnings projections.  Here the PE can go higher, but Wall Street’s earnings estimates are still too high.
  • Investors also need to know that on a historical basis the current PE is no bargain.
  • Yesterday, the stock market was a mirror image of October 13.  On October 13, CPI came worse than expected – the market opened significantly lower and rallied all day.  Yesterday, CPI came better than expected – the market opened significantly higher and then fell all day.  Please see yesterday’s Afternoon Capsule for details.
  • The consensus is that the Fed will raise interest rates by 0.5%.  The immediate driver of the stock market will be the following:
    • Does dovish or hawkish Powell show up?
    • The dot plot
  • The dot plot shows the forecast of the FOMC members.  In September, the dot plot showed a median Fed funds rate of a little below 5% next year.
  • The futures market is forecasting a high rate next year of 4.82%.
  • Powell could conceivably declare victory over inflation given the latest data.  In such an event, the stock market can easily move up 5% – 10% in one day.
  • Alternatively, Powell could emphasize that for the Fed to not repeat Burns’s blunder, the Fed has to target the labor market, especially in services.  The labor market has continued to stay strong.  This necessitates further work from the Fed.  If Powell takes this posture, the stock market could go down 2% – 5%.
  • Here are the probabilities:
    • Market going higher 45% from prior 40%
    • Market staying range bound 25% from prior 30%
    • Market falling 30% from prior 30%
  • Positive seasonality kicks in in the second half of December. From a traditional, technical analysis perspective, yesterday’s drop in the stock market from the open was on high volume, giving a classic sell signal. However, as we have repeatedly written before, investors should not rely only on traditional technical analysis.  It does not work as well now as it used to back in the 1980’s.  This is the reason that The Arora Report has developed new proprietary technical analysis techniques that work in the current market.
See also  A GAME CHANGER FOR TESLA IN CHINA ALSO HELPING APPLE, JAPAN INTERVENES, TREASURY REFUNDING

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 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 🔒 oil 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 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 $1819, silver futures are at $23.94, and oil futures are at $76.15.

S&P 500 futures resistance levels are 4200, 4318, and 4400: support levels are 4000, 3950, and 3860.

DJIA futures are up 31 points.

 

REDUCE CASH AND HEDGES – INFLATION COOLS

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

Reduce Cash And Hedges

Only those who understand the following may consider reducing cash and hedges.

  • These changes may need to be reversed quickly, and there may be a whipsaw.
  • The Fed’s statement and Powell’s press conference are ahead tomorrow. These have the potential to further propel the rally or crush the rally.
  • Wall Street earnings estimates are still too high.
  • The new year may see selling.

Please see the “Protection Band And What To Do Now” section below.  Make adjustments according to personal risk preference.

Inflation Cools

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:

  • CPI data shows inflation has cooled.  Here are the details:
    • CPI came at 0.1% vs. 0.3% consensus.
    • Core CPI came at 0.2% vs. 0.3% consensus.
  • The chart shows that the market has moved into the support/resistance zone.  There is technical resistance ahead.
  • Seasonality is positive.
  • As the day progresses, RSI is likely to be on a buy signal.
  • Expect momo gurus to come up with narratives to start pushing the market towards S&P 500 levels of 4400 – 4500.
  • In the early trade, buying is very aggressive in speculative and junk stocks.
  • If the earnings in January disappoint, there is a significant downside to this market. Considering the economic conditions, the market is not inexpensive.  There is not the valuation support that we would like to aggressively buy stocks.

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

Gold is rallying on a weaker dollar.

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 being bought along with speculative stocks.

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 $24.03, and oil futures are at $74.77.

S&P 500 futures resistance levels are 4200, 4318, and 4400: support levels are 4000, 3950, and 3860.

DJIA futures are up 748 points.

 

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

Review Your Portfolio

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 the stock market is in no man’s land.
  • The chart shows that the price pattern is such that a major binary move can occur in either direction.
  • Two major potentially market moving events are ahead.
    • CPI data will be released Tuesday, December 13 at 8:30am ET.
    • FOMC will announce its rate decision on Wednesday, December 14 at 2pm ET  followed by Powell’s press conference.   The consensus is for the Fed to raise interest rates by 50 basis points.
  • 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.”
  • Run away from anyone who claims to know the CPI data tomorrow or what Powell will say in his press conference.
  • Arora’s Third Law states, “ Making investing and trading decisions based on probabilities is the only realistic and profitable approach.”
  • Here are the probabilities:
    • Market going higher 40%
    • Market staying range bound 30%
    • Market falling 30%
  • There are many scenarios.  Here are the base cases:
    • If an up move occurs, it is likely to be 5% – 12% between now and the end of the year.
    • If a down move occurs, it is likely to be 10% – 22% between now and the end of the year.
  • In view of the high uncertainty, consider reviewing your portfolio and adjusting your cash level and hedges based on your personal preference within the protection band.

Game Changing Fusion Breakthrough

The U.S. Energy Secretary Jennifer Granholm is expected to announce tomorrow a major breakthrough in fusion.

In fusion, two atoms are fused together.  One of the companies Nigam Arora founded worked on fusion.  In very simple words, think of fusion as a man made sun.  The breakthrough appears to have occurred at Lawrence Livermore National Laboratory. The lab appears to have achieved net energy gain from an experimental fusion reactor.

Assuming the breakthrough is what it appears to be and the breakthrough is followed by rapid progress towards commercialization, it will have a major impact on many of your investments.  It will create many new opportunities to generate a fortune. All of this is likely years away, but investors will likely start moving various investments in anticipation.

If the fusion breakthrough is an area of interest for a podcast, please write to Ambassador@TheAroraReport.com.

COVID By A Different Name

COVID is rapidly spreading in China.  However, officially China is reporting a drop in the number of cases.  The reason is that they are testing a lot less and, in some places, they are stopping testing.  After rigorously enforcing Zero COVID policy and claiming that COVID was very dangerous, Chinese authorities have made an abrupt change and are now claiming that Omicron is no more dangerous than the flu.  A large section of the Chinese population is puzzled.  There is speculation that the Chinese government is considering changing the name of the COVID virus.

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 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 $1801, silver futures are at $23.68, and oil futures are at $71.53.

S&P 500 futures resistance levels are 4000, 4200, and 4318: support levels are 3860, 3770, and 3630.

DJIA futures are up 67 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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