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 What To Do Now.
BACK TO THE BATTLE GROUND ZONE, ISLAND REVERSAL, MOMO BUYING, HTZ CIRCUS
To gain an edge, this is what you need to know today.
Battle Ground Zone And Island Reversal
Stocks are now back to the battle ground zone. Let’s explore with the help of two charts
The Charts
Please click here for an annotated chart of S&P 500 ETF (SPY).
Please click here for an annotated chart of ETF (DIA) which represents Dow Jones Industrial Average Index (DJIA).
Note the following:
- The first chart is a daily chart for a short term perspective.
- The second chart is a monthly chart for a long term perspective.
- The first chart shows an island reversal pattern. This is a negative pattern especially after a sustained market rise. Historically it means more buying first on the dip and then lower lows.
- The second chart shows that the market is back in the zone marked ‘support/resistance zone’.
- The second chart shows that the market has moved below the top band of the zone but is still positive for the month. The trend is still up.
- The last candle shown on the second chart will need to turn red for the trend to reverse. For those who are not familiar with candle stick charts, it means that the market will need to go negative for the month of June.
- The chart shows that the market overshot above the top band of the zone.
- A big part of the reason for the overshoot was that practitioners of the traditional technical analysis had put their stops on short positions right above the top band of the zone. Since everybody knows what practitioners of traditional technical analysis do, smarter players have developed ‘hunt and destroy’ algorithms. These algorithms simply run the market up through the stops to take the stops out. This is exactly what happened here. It is unfortunate that this type of technical analysis is still taught by many gurus and practiced by a large number of their followers. This is a good example to show that what is widely known leads to losses and why certain aspects of traditional technical analysis should be abandoned.
- As we have been sharing with you, our proprietary indicators for the sentiment had reached the extreme bullish zone. At extremes sentiment is a contrary indicator. In plain English this means a sell signal, we have been sharing this signal with you for several days in the Afternoon Capsules.
HTZ Circus
In the Morning Capsule, we typically do not write about individual companies. However we are writing about Hertz to illustrate the rampant speculation like never seen before in many respects that is taking place now in the stock market.
In a first, HTZ wants to sell $1 billion worth of stock while in bankruptcy to replace debtor in possession financing. This has never been done before in a case like Hertz where the stock was worthless. The reason that this has never been done before is that the money from the stock holders would simply go to the bond holders and stock holders would lose all of their money. In the past the government never would have allowed such a thing and no informed investor would have bought such a stock.
The fact that Hertz wants to do this to take advantage of the uninformed investors shows that times have changed. If uninformed investors keep on jumping on the stock, it is conceivable that Hertz could make a case that the stock has value based on the buying by uninformed investors and potentially try to reverse the bankruptcy. Anyone who is in HTZ stock should seriously consider exiting because of the rampant speculation.
Momo Crowd And Smart Money In Stocks
The momo crowd is aggressively buying stocks in the early trade. Smart money is inactive.
Gold
The momo crowd is aggressively buying gold in the early trade. Smart money is inactive.
For longer term, please see gold and silver ratings.
Oil
The momo crowd is aggressively buying oil in the early trade. Smart money is inactive.
For longer term, please see oil ratings.
Marijuana
The momo crowd is buying marijuana stocks in the early trade. Smart money is inactive.
Technical Patterns
None of note.
This is powerful information and many investors use this to enter trades in addition to our official signals. Here are the three most common uses: 1) Short-term trades in ETFs 2) Decisions to trim or add to long-term positions, and 3) New option trades. These should be used judiciously only in conjunction with macro, fundamental and quantitative indicators. To learn more please click here.
Markets
Our very, very short-term early stock market indicator is neutral but expect the market to open strongly higher. 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 range bound.
Gold futures are at $1746, silver futures are at $17.75, and oil futures are $36.82.
S&P 500 futures resistance levels are 3075, 3114 and 3124: support levels are 3009, 2924 and 2870.
DJIA futures are up 652 points.
THE MOST IMPORTANT MESSAGE FOR INVESTORS; FED ‘NOT THINKING’ — RAMPANT SPECULATION TO THE UPSIDE AND EVENTUAL CRASH
To gain an edge, this is what you need to know today.
The Most Important Message
First and foremost, here is the most important message: Stock market investors’ job is to make money consistently from all market conditions — be it rampant speculation, coronavirus, good or bad economy, or ultimately Fed and politician induced stock market crash.
Prepare Now For The Future
It is time for investors who have made a ton of money in the stock market over the last decade to say thank you to the Fed. This is not to diminish the genius of the investors to buy into the rising market primarily due to money printing by the Fed but to help investors in the stock market prepare for the future.
Fed ‘Not Thinking’
In the press conference, Fed Chair Powell was adamant and defiant in that irrespective of asset bubble in the stock market or good economic data, the Fed is set on a course to continue massive money printing and keep interest rates at zero through 2022. Here is the most striking statement from the Fed Chair Powell, “So we’re not thinking about raising rates. We’re not even thinking about, thinking about raising rates”. Notice the double emphasis on ‘thinking’.
Tutoring Complete
It is a big milestone for the United States. Finally the tutoring of the Fed, supposedly an independent body, by the politicians is complete — it is all about ‘not thinking’ — not thinking about how to ultimately unwind the massive balance sheet the Fed is building and the massive national debt that politicians are just happy to undertake.
What Does It Mean?
What does it mean for stock market investors? In theory, it will lead to rampant stock market speculation to the upside and ultimately a massive crash. Of course this is in the longer term. In the very short term the stock market is very overbought and overbought markets tend to be vulnerable to the downside. Further, we have been sharing with you that proprietary sentiment indicators at The Arora Report have been in the extreme zone. Sentiment is a contrary indicator at extremes. In plain English, this means that when sentiment is extremely bullish, it is a sell signal. Let’s explore with the help of a chart.
The Chart
Please click here for an annotated chart of Dow Jones Industrial Average ETF (DIA) which represents the popular stock market index Dow Jones Industrial Average (DJIA).
Note the following:
- First and foremost, everything that impacts the markets including macro-economic data, fundamentals, sentiment, risk appetite, short squeezes as well as monetary and fiscal policies get reflected in the charts. It takes years of observation, hard work and dedication to learn to correctly read the charts. The naysayers simply have not spent the time and effort needed to benefit from the charts.
- Start from the left hand side of the chart. The chart shows that in 2007 before the 2008 great recession, the Federal Reserve balance sheet was $0.87 trillion.
- The chart shows that in March 2009 an aggressive buy signal was given by The Arora Report which turned out to be the start of the great bull market. The Fed balance sheet was $2.08 trillion.
- The chart shows that by 2012 the Fed balance sheet had ballooned to $2.8 trillion.
- The chart shows that by 2018, the Fed balance sheet had exploded to $4.4 trillion.
- Don’t let the fancy words about the increase in the Fed’s balance sheet confuse you. It is just a fancy description among the elite for money printing.
- The chart shows the rise in the stock market coincided with more money printing by the Fed. As the Fed printed more money it went into assets such as stocks, bonds and real estate. Those with capital got richer. Working class people who were depending on their labor and not on the capital got relatively poorer — herein lies the root of income inequality in our society.
- In 2018, finally after years of money printing the Fed got the religion. Apparently somebody told the Fed that there was no free lunch. The Fed embarked on reducing its balance sheet.
- The chart shows that the Fed balance sheet was reduced to $3.77 trillion — only a marginal takeback of the money that was printed.
- The chart shows that the stock market threw a big tantrum. In December 2018, as shown on the chart, the stock market went down quickly about 20%.
- The drop in the stock market — mind you still at a great levitation from the lows in 2009 — apparently scared the Fed and the politicians. They decided that it was better in the short term for them to let the tail wag the dog. The tail being the stock market and the dog being the future of the U. S. A.
- The Fed made an about face. The stock market took off again.
- The chart shows that in October 2019, the Fed added a small amount of additional liquidity and the stock market took off to new heights.
- The chart shows that now the Fed money printing has reached $7.17 trillion on the way to $10 trillion. This is on top of the national debt of $26 trillion. Who is counting? The party is in full swing. The rich are getting richer and plenty of lip service is being given to the working class to keep them in line.
Rampant Speculation And Crash
You had to be under a rock not to have noticed the rampant speculation in the stock market over the last couple of months. Perhaps the money flowing in the big five tech stocks Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG) (GOOGL) and Facebook (FB) can be justified but how about the money flowing in bankrupt companies Hertz (HTZ), JC Penny (JCP), Whiting Petroleum (WLL); and in travel companies such as American Airlines (AAL), United Airlines (UAL), Carnival Cruise (CCL) and Royal Caribbean (RCL). As the virus cases were rising in many states, the stock markets answer was to buy airlines and cruise lines. This is how rampant speculation looks. You have seen nothing yet, thank you Fed.
Yes, your questions regarding the crash need to be answered. These will be answered in future columns. For the time being, the most important message is worth repeating: Investors’ job is to make money consistently from all market conditions — be it rampant speculation, coronavirus, good or bad economy, or ultimately Fed and politician induced stock market crash.
Jobless Claims
Jobless Claims came at 1.542 million vs. 1.525 million consensus.
Producer Price Index (PPI)
Core PPI came at -0.1% vs. 0.0% consensus.
Momo Crowd And Smart Money In Stocks
The momo crowd is aggressively selling stocks in the early trade. Smart money is inactive.
Gold
The momo crowd is aggressively buying gold in the early trade. Smart money is inactive.
For longer term, please see gold and silver ratings.
Oil
The momo crowd is aggressively selling oil in the early trade. Smart money is inactive.
For longer term, please see oil ratings.
Marijuana
The momo crowd is selling marijuana stocks in the early trade. Smart money is inactive.
Technical Patterns
None of note.
This is powerful information and many investors use this to enter trades in addition to our official signals. Here are the three most common uses: 1) Short-term trades in ETFs 2) Decisions to trim or add to long-term positions, and 3) New option trades. These should be used judiciously only in conjunction with macro, fundamental and quantitative indicators. To learn more please click here.
Markets
Our very, very short-term early stock market indicator is negative. 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.
Gold futures are at $1736, silver futures are at $18.02, and oil futures are $36.90.
S&P 500 futures resistance levels are 3114, 3124 and 3155: support levels are 3075, 3009 and 2924.
DJIA futures are down 882 points.
A WHIFF OF DEFLATION, OECD GRIMM WARNING, CORONAVIRUS RISING IN SOME STATES, SHOCKING OIL BUILD
To gain an edge, this is what you need to know today.
Whiff Of Deflation
Core Consumer Price Index (CPI) which excludes food and energy, came at -0.1% vs. +0.0% consensus. We exclude food and energy because they are too volatile and hinder projections.
The headline CPI which includes food and energy also came at -0.1% vs. +0.0% consensus.
This data indicates a whiff of deflation. The Fed is worried about deflation. If anything, this data is going to encourage the Fed to print more money.
OECD Grimm Warning
OECD is an inter government economic organization which includes 37 countries as members. OECD is issuing a grimm warning:
- A second wave of virus is as likely as not.
- If there is no second virus wave, U. S. GDP will take a hit of 7.3% in 2020 but grow 4.1% in 2021.
- If there is a second wave of virus, the U. S. GDP will take a hit of 8.5% in 2020 and grow 1.9% in 2021.
This is a very grim forecast. However the momo crowd is buying on this forecast with the assumption that central banks will print more money.
Fed
The Fed will announce its decision at 2:00 pm ET. Please stay alert this afternoon in case there are new opportunities.
Momo Crowd And Smart Money In Stocks
The momo crowd is buying stocks in the early trade. Smart money is inactive.
Gold
The momo crowd is aggressively buying gold as is the usual pattern going into the Fed decision. Smart money is inactive.
For longer term, please see gold and silver ratings.
Oil
API showed oil inventory build of 8.42M barrels vs. consensus of a draw of 1.74M barrels. This is very bearish data about oil. By inference, it has a negative projection for how well the economy is opening. So what does the momo crowd do on the highly bearish data? They keep on buying based on the upward momentum.
Smart money is selling into the strength.
For longer term, please see oil ratings.
Marijuana
The momo crowd is buying marijuana stocks in the early trade. Smart money is inactive.
Technical Patterns
None of note.
This is powerful information and many investors use this to enter trades in addition to our official signals. Here are the three most common uses: 1) Short-term trades in ETFs 2) Decisions to trim or add to long-term positions, and 3) New option trades. These should be used judiciously only in conjunction with macro, fundamental and quantitative indicators. To learn more please click here.
Markets
Our very, very short-term early stock market indicator is negative but expect the market to open higher. 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.
Gold futures are at $1729, silver futures are at $18.08, and oil futures are $38.33.
S&P 500 futures resistance levels are 3228, 3278 and 3320: support levels are 3182, 3155 and 3124.
DJIA futures are down 7 points.
SOME COMPONENTS OF SENTIMENT JUMP TO 20 YEAR HIGH, FED MEETING
To gain an edge, this is what you need to know today.
Extreme Sentiment
Some components of our proprietary sentiment indicator are at a 20 year high. They are higher than they were in 2007 before the market crashed in 2008. They are at the same level as they were in 1999. In 2000 the stock market crashed and those with portfolios concentrated in speculative stocks and technology stocks lost over 90% of their value.
Overall as we have been writing in the Afternoon Capsule, sentiment has lately fluctuated between very positive to extremely positive. When sentiment becomes extremely positive, it is a contrary indicator. In other words, extreme positive sentiment is a sell signal.
Cross Currents
No action should be taken based on only one indicator. There are always cross currents. Various cross currents need to be weighed.
Here are the biggest positives for the stock market right now:
- Leading economic indicators have turned positive.
- High frequency economic indicators have turned positive.
- Market breadth has broadened.
- Many sectors within the stock market are behaving as they historically do at the beginning of a new bull market.
- There is $5 trillion on the sidelines.
Here are the biggest negatives for the stock market right now:
- Sentiment is extremely positive.
- The stock market is very overbought in the short term. Overbought markets tend to be vulnerable to the down side.
- Valuations are stretched.
- The prevailing wisdom in the stock market is that coronavirus is behind us. However in reality, the best word we can come up with to describe the stock market’s prevailing wisdom is ‘fantasy’.
All of these factors are taken into account to arrive at the guidance given in ‘Protection Bands and What To Do Now?’ below, buy zones, position sizing, Buy Now ratings, nibbling, strategic vs. tactical calls and new Signals and Signal Limiteds. All of the above plays a major role in portfolio construction.
Fed Meeting
The Fed is starting its two day meeting today. The Fed will announce its policy decision tomorrow. The consensus is for no change in policy.
Momo Crowd And Smart Money In Stocks
The momo crowd is buying stocks in the early trade. Smart money is selling stocks.
Gold
Gold is often bought going into a Fed decision. Today is no different from the historical pattern. Gold is being aggressively bought as of this writing.
The momo crowd is buying gold in the early trade. Smart money is inactive.
For longer term, please see gold and silver ratings.
Oil
The momo crowd is selling oil in the early trade. Smart money is selling oil.
For longer term, please see oil ratings.
Marijuana
The momo crowd is buying marijuana stocks in the early trade. Smart money is inactive.
Technical Patterns
Malaysian shares are tracing a shooting star. This is bearish. ETF of interest is EWM.
This is powerful information and many investors use this to enter trades in addition to our official signals. Here are the three most common uses: 1) Short-term trades in ETFs 2) Decisions to trim or add to long-term positions, and 3) New option trades. These should be used judiciously only in conjunction with macro, fundamental and quantitative indicators. To learn more please click here.
Markets
Our very, very short-term early stock market indicator is negative. 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.
Gold futures are at $1724, silver futures are at $17.93, and oil futures are $37.90.
S&P 500 futures resistance levels are 3228, 3278 and 3320: support levels are 3182, 3155 and 3124.
DJIA futures are down 328 points.
IS THE RECESSION OVER? IS JOBS DATA FLAWED? HERE IS WHERE TO HUNT FOR STOCK MARKET OPPORTUNITIES
To gain an edge, this is what you need to know today.
Recession And Jobs Data
Here is the key question for stock market investors, “Is the recession over?” Unless the data changes, the answer appears to be ‘yes’ at this time.
The stock market rallied big on stunningly strong jobs data released by the Bureau of Labor Statistics. In my memory, this jobs data was the biggest miss by economists in their estimates that the economy was going to lose about 7.5 million jobs in May. The jobs report indicated that the economy added 2.5 million jobs. Was the jobs data flawed? In footnotes to the jobs report, the government admitted that there were flaws.
Previously the jobs data released by ADP (ADP), a large private payroll processor, was also unexpectedly strong but apparently had flaws. Stock market bears should not take comfort in the flaws in the jobs data. Even after adjusting for the flaws, the jobs data is still very positive. The jobs data is a lagging indicator. In our ZYX Asset Allocation Model with inputs in 10 categories, we focus on leading economic indicators. Leading indicators and high frequency economic indicators are also running significantly stronger than expectations. In the middle of May, we informed you of a scenario that the market could hit new highs quickly on a second leg of short squeeze. At that time not many were talking about new highs. Now Nasdaq has hit a new intraday high. This is the power of scenario analysis, not being a bull or a bear, being nimble and investing based on probabilities. The second leg of short squeeze is now in full swing. So where is the fertile hunting ground for opportunities in the stock market? The fertile ground is in lower weighted stocks in the S&P 500 (SPX). Let’s explore with the help of a chart.
The Chart
Please click here for an annotated chart of Dow Jones Industrial Average ETF (DIA) which represents the popular stock market index Dow Jones Industrial Average (DJIA).
Note the following:
- First and foremost, everything that impacts the markets including macro-economic data, fundamentals, sentiment, risk appetite, short squeezes as well as monetary and fiscal policies get reflected in the charts. It takes years of observation, hard work and dedication to learn to correctly read the charts. The naysayers simply have not spent the time and effort needed to benefit from the charts.
- The chart also shows S&P 500 ETF (SPY) which represents the benchmark stock market index S&P 500, equal weighted S&P 500 ETF (RSP), small-cap ETF (IWM) which represents the popular small-cap index Russell 2000 (RUT) and Nasdaq 100 ETF (QQQ) which represents the Nasdaq 100 (NDX).
- The chart walks through the recent history of Fed actions. The chart shows that when the Fed started tightening in 2018, the stock market dropped. When the Fed started easing in January 2019, the stock market recovered. In October 2019, when the Fed started adding more liquidity, the stock market took off. In March 2020, after the coronavirus drop in the stock market, the Fed actions engineered a massive stock market rally.
- The chart shows that small-caps did not make a decisive new high prior to coronavirus stock market drop like the other ETFs shown on the chart.
- The chart shows that out of the five ETFs shown on the chart, only QQQ did not make a lower low after the coronavirus stock market drop compared to the December 2018 stock market low due to Fed tightening. This showed that Nasdaq 100 was favored by the investors as the top five stocks Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOG) (GOOGL), and Facebook (FB) were where the investors were hiding during the coronavirus market drop.
- The chart shows that QQQ had led other ETFs during the rally.
- The far right hand side of the chart shows the recovery rally.
- In the recovery rally, ETF QQQ has the lowest slope as shown on the chart. This indicates that the money is not flowing into the top five stocks mentioned above at the same rate as before.
- The chart shows that during the recovery rally, S&P 500 equal weighted ETF RSP is exhibiting the highest slope.
- The sum of the foregoing is twofold: First the Fed is driving the rally. The second, the fertile ground for hunting new opportunities is in those stocks that are in S&P 500 but have lower weighting. These stocks tend to be industrial cyclicals, materials, energy and consumer discretionary. This is the reason that airline stocks such as American (AAL) and United (UAL), cruise line stocks such as Carnival (CCL) and Royal Caribbean (RCL), oil stocks such as Occidental (OXY) and Apache (APA), and retail stocks such as Kohl’s (KSS) and L Brands (LB) are moving up. Investors should not get carried away as these stocks also carry extraordinary large risks. A big part of the move in these stocks is due to vicious short squeezes.
Risks
As an important note of caution, the data is very fluid and health related risks are still there. There are reports of increase in coronavirus cases at some places. The protests may also lead to more coronavirus cases. There is great progress on vaccine and antivirals but there are no guarantees. The Fed seems to want to stay the course but that may change in view of the strong economic data.
Recovery Portfolios
We are working on separate Recovery Portfolios and will make those available to you in the near future. Right now jumping into these stocks and ETFs that are hot is fraught with extremely high risk.
Momo Crowd And Smart Money In Stocks
The momo crowd is extremely aggressively buying stocks in the early trade. Smart money is inactive.
Gold
The momo crowd is aggressively selling gold in the early trade. Smart money is inactive.
For longer term, please see gold and silver ratings.
Oil
The momo crowd is extremely aggressively buying oil in the early trade. Smart money is inactive.
For longer term, please see oil ratings.
Marijuana
The momo crowd is buying marijuana stocks in the early trade. Smart money is inactive.
Technical Patterns
None of note.
This is powerful information and many investors use this to enter trades in addition to our official signals. Here are the three most common uses: 1) Short-term trades in ETFs 2) Decisions to trim or add to long-term positions, and 3) New option trades. These should be used judiciously only in conjunction with macro, fundamental and quantitative indicators. To learn more please click here.
Markets
Our very, very short-term early stock market indicator is neutral but expect the market to open strongly higher. 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 weaker.
Gold futures are at $1694, silver futures are at $17.83, and oil futures are $38.81.
S&P 500 futures resistance levels are 3228, 3278 and 3320: support levels are 3200, 3182 and 3155.
DJIA futures are up 251 points
WHAT TO DO NOW
Looking ahead and not only in the rear view mirror, consider continuing to hold existing core portfolio positions. Based on individual risk preference, consider holding cash or treasury bills 27% – 35% and short to medium-term hedges of 3% – 8% and short term hedges of 3% – 10%.
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