By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
U.S. Credit Downgraded
Please click here for a chart 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 consolidating in no man’s land.
- The chart shows that the stock market is very stretched way above the 200 day moving average.
- The RSI pattern shown on the chart indicates that the stock market can go either way.
- The Arora Report had previously shared with you in advance that Fitch was warning it might downgrade the U.S. credit rating.
- Fitch has downgraded the U.S. credit rating from AAA to AA+. Fitch gives the following three reasons:
- Fiscal deterioration is anticipated to continue.
- The general government debt burden is too high and continues to grow.
- Compared to AAA peers, there is an erosion of governance in the U.S.
- The chart shows that the downgrade of the U.S. credit has not had much impact on the stock market in the early trade.
- In The Arora Report analysis, the Fitch downgrade is justified, and the three reasons Fitch gave are correct.
- In history, there has only been one other downgrade of U.S. credit. This was in 2011 by S&P.
- The downgrade of U.S. credit resonated across the globe, but not in the U.S.
- On the downgrade, stocks fell in Japan by 2.3%, in Hong Kong by 2.5%, South Korea by 1.9%, in Australia by 1.2%, and in India by 1.0%.
- Stocks in Europe opened lower, but as investors saw aggressive buying coming in U.S. stock futures, investors started buying the dip in European stocks. Stocks in Germany are down 0.8%, in the U.K. by 1.0%, in France by 0.6%, in Italy by 0.8%, and in Spain by 1.2%.
- The momo crowd in the U.S. aggressively bought the shallow dip in stocks on the downgrade.
- The momo guru narrative is that neither the Fitch downgrade nor the rising U.S. national debt matters to investors because there is upward momentum in the stock market. In our over 40 years in the markets, we have repeatedly seen that upwards momentum can quickly disappear. Until upward momentum disappears, our job as investors is to acknowledge the reality that the momo crowd controls the market and the momo crowd does not care about the debt.
- In The Arora Report analysis, here is an important piece of new data that prudent investors should pay attention to. The U.S. Treasury Department has announced that it plans to borrow about $1T in the third quarter. This is the largest amount ever to be borrowed by the U.S. in any third quarter. More importantly, the amount to be borrowed is about $200B more than the prior estimates.
- As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.
ADP
ADP is the largest private payroll processor in the country. ADP uses its data to give a glimpse of the jobs picture before the official jobs report that will be released Friday at 8:30am ET.
ADP data shows that the jobs picture continues to be very strong. ADP employment change came at 324K vs. 185K consensus.
ADP data runs counter to the momo gurus’ narrative that the Fed will start cutting rates as early as September. Momo gurus have used this narrative, in part, to successfully run up the stock market.
Blind Money
Blind money is the money that flows into Wall Street on the first two days of the month without any analysis and irrespective of stock market conditions. Blind money is typically invested in the afternoons. Wall Street professionals front run the blind money by buying in the morning and selling to blind money at inflated prices in the afternoon. Blind money is helping cushion the drop in the stock market on the credit downgrade.
Magnificent Seven
Since the AI frenzy driven rally has been led by the magnificent seven stocks, it is important for investors to pay attention to the magnificent seven stocks. Today, it is especially important to see how the magnificent seven stocks react to the U.S. downgrade.
In the early trade, money is flowing out of Apple (AAPL), Nvidia (NVDA), Alphabet (GOOG, GOOGL), Amazon (AMZN), and Tesla (TSLA). Money flows are especially negative in TSLA in the early trade.
In the early trade, money flows are positive in Microsoft (MSFT) and Meta (META).
Apple and Amazon will report earnings tomorrow after the market close.
Money flows in NASDAQ 100 ETF (QQQ) started the day out by being very negative, but they have turned positive as of this writing.
AMD
AMD (AMD) is not one of the magnificent seven stocks, but it is an important stock because AMD has the next best GPUs after Nvidia. GPUs are essential for the large language model generative AI. ChatGPT was trained on 10,000 Nvidia GPUs.
We wrote yesterday after AMD earnings:
If it was not for AI, AMD stock would have experienced a significant drop because the numbers are below whisper numbers and the stock had run up going into earnings. The seven different mentions of AI in the earnings is helping the stock move higher.
The AMD conference call was very positive and emphasized that AMD is achieving strong engagement with potential customers on its artificial intelligence products. AMD admitted that engagement does not mean revenues.
In The Arora Report analysis, an important point that no one is talking about is that AI products from AMD will dilute its margins. Here is the key question for investors: Will the market care about lower margins in view of the expensive valuation of the stock, or will investors look past negatives in excitement over AI?
Those who want in-depth knowledge on AMD, listen to the podcast titled “Gaining An Edge: Semiconductors Are The Lifeblood Of AI.”
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
Gold is seeing buying on the U.S. credit rating downgrade. In The Arora Report analysis, buying in gold is nowhere near as strong as would have been expected on the U.S. downgrade. The reason is the long term interest rates are rising, and gold moves inverse to interest rates in the short term.
The momo crowd is 🔒 gold in the early trade. Smart money is 🔒 gold 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 seeing buying on the U.S. credit downgrade.
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 and bonds are range bound.
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 $1981, silver futures are at $24.27, and oil futures are at $81.61.
S&P 500 futures are trading at 4569 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 191 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.
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.
