WEEKLY MARKET DIGEST: HOW TO UNDERSTAND AND PROSPER FROM MARKET GYRATIONS $DIA $GLD $QQQ $SLV $SPY $BTC.X $TBT $USO

WEEKLY MARKET DIGEST: HOW TO UNDERSTAND AND PROSPER FROM MARKET GYRATIONS $DIA $GLD $QQQ $SLV $SPY $BTC.X $TBT $USO

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.

WHAT IS NEXT FOR STOCKS? A BULLISH ‘W’ PATTERN OR A BEARISH BREAK, MOMO BUYING STOCKS BUT SELLING GOLD AND OIL

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

Momo  And Smart Money

In early trading, the momo crowd is aggressively buying stocks but aggressively selling gold and oil.

The smart money is inactive.

W Bottom Or Bearish Break

The stock market is very complex. Setting aside the complexity, the simplest thing investors can do to gain valuable insight is to look at patterns. To explore what is next for stocks, let us look at a chart.

The chart

Please click here to see annotated chart of S&P 500 futures (ES_F). Similar conclusions can be drawn from popular ETFs such as S&P 500 ETF (SPY), Nasdaq 100 ETF (QQQ) and small cap ETF (IWM). It is more instructive to use futures chart because futures trade overnight and there is a very important point on the chart that is visible only on the futures chart.

Please note the following from the chart:

  • In recent history, most of the very shallow dips formed a ‘V’ pattern. In a V pattern, the dip is bought and the market recovers.When the market dipped this time, many were expecting a V bottom. The chart shows that a V bottom did not occur. This was addressed in the early stages of the stock market dip, when many gurus were predicting a V bottom, in the Morning Capsule that is made available to subscribers of The Arora Report. The Morning Capsule stated that, “If the stock market continues to go up from here, it would have formed a V bottom yesterday. Historically, V bottoms are less common than the retest. If a retest were to occur, the market would fall back to yesterday’s lows. The momo crowd likely has stops under yesterday’s lows. A typical scenario would be hunt and destroy algorithms to become active, take out stops of the momo crowd and then for the market to rebound. If a retest occurs and it fails, then the probability of something more than a garden variety correction will rise.”This observation has now proven spot on. A V bottom did not occur this time.
  • The chart shows that a retest of the prior low marked with a horizontal white line is in progress.
  • The chart shows two scenarios from here on that will result in a bullish ‘W’ pattern. These are shown with green dotted lines on the chart.
  • The chart also shows two scenarios if the retest fails. This will be a bearish break. These scenarios are shown with dotted red lines on the chart.

Probabilities not certainties

It is high time to remind investors of Arora’s Second Law Of Investing, ‘No one knows with certainty what is going to happen next.’ The best way to handle uncertainty is to think in terms of probabilities.

The probability of a bullish W pattern forming is significantly higher than a bearish break.

Timing Model

In addition to the simple chart, those interested in a comprehensive approach may look at The Arora Report timing model with inputs in 10 categories. The model is adaptive, i.e., it changes automatically with market conditions. To see the 10 inputs, please click here.

Technical Patterns

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 undeterminable due to the noise.

Gold futures are at $1315, silver futures are at $16.28, and oil futures are $60.50.

S&P 500 resistance levels are 2615, 2631 and 2661; support levels are 2594, 2550, and 2500.

DJIA futures are up  105 points.

WEAK BOND AUCTION CAUSING MORE STOCK VOLATILITY, MOMO SELLS GOLD AND OIL

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

Weak Bond Auction Causes More Stock Volatility

To finance the large U. S. debt, the U. S. Treasury conducts bond auctions.  In the latest bond auction, demand for buying the U. S. debt was significantly less than expected.  This is causing interest rates to tick up and bonds to fall.  These results caused stocks to give up their significant gains yesterday.

Significant selling was occurring this morning in stocks but then on a slight up move, the momo crowd stepped in and started buying aggressively.

The smart money is inactive.

Gold

Gold has fallen because the momo crowd has been aggressively selling gold.

The smart money stepped in around $1313 to lightly buy gold.

Oil And Natural Gas

EIA data showed larger than expected build of oil inventories.  The momo crowd is aggressively selling oil.

EIA data for natural gas inventories will be released at 10:30 am.

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 undeterminable due to unprecedented  noise in the data.

Gold futures are at $1315, silver futures are at $16.33, and oil futures are $61.96.

S&P 500 resistance levels are 2688, 2700 and 2740; support levels are 2661, 2631, and 2615.

DJIA futures are up 138 points.

V BOTTOM OR RETEST AFTER THE REBOUND, MOMO SELLS GOLD, RBI WARNS

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

Asia In The Driver Seat

Over night several Asian markets started out positive on the heels of gains in the United States. However, most Asian markets were not able to hold the gains and some ended negative. Some of that weakness is being carried to the United States this morning.

Momo Selling Again

The momo crowd has been getting whipsawed.  The momo crowd has lost a lot of money because the market has been volatile.  If every move up or down in DJIA is counted, the total move over the last week has been about 20,000 points.

Momo has been buying on every sign of an up move and then getting stopped out.  Then they short sell on every sign of down move and get stopped out again. This is a good way to the poor house.

Near the close yesterday, the momo crowd was aggressively buying as the market had rebounded.

In early trade, the market is showing weakness.  Now the momo crowd is selling aggressively.

The smart money lightly bought near the lows yesterday morning and has been inactive since then.

V Bottom Or Retest After

If the stock market continues to go up from here, it would  have formed a V bottom yesterday. Historically, V bottoms are less common than the retest.  If a retest were to occur, the market would fall back to yesterday’s lows.  The momo crowd likely has stops under yesterday’s lows.  A typical scenario would be hunt and destroy algorithms to become active, take out stops of the momo crowd and then for the market to rebound.

If a retest occurs and it fails, then the probability of something more than a garden variety correction will rise.

At The Arora Report we are alert and keeping a close eye.

Momo Sells Gold

The momo crowd is aggressively selling gold this morning.

The smart money is inactive.

Oil And Natural Gas

Natural gas has now given up all of the gains from the short squeeze.

Oil initially got some support when API reported a build of 3.189 million barrels vs. a consensus of 459K barrels.  This morning crude is coming under pressure as traders await EIA data to be released at 10:30 am ET.

Germany

German Chancellor Merkel has reached a deal to form a government.  This should end months of stalemate.

RBI Warns

Reserve Bank of India, equivalent of the Fed in the United States, is showing an independent streak.  It is warning that Modi’s budget is inflationary.  RBI did not raise rates but it appears RBI is turning hawkish.  We will do a separate post on ZYX Emerging.

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 can quickly turn positive due to high volatility in the market.

Interest rates, bonds and currencies are range bound.

Gold futures are at $1323, silver futures are at $16.37, and oil futures are $63.22.

S&P 500 resistance levels are 2688, 2700 and 2740; support levels are 2661, 26c31, and 2615.

DJIA futures are down 61  points.

MARKET OVERSOLD, PENNY PICKERS AND NOT FUNDAMENTALS ARE BEHIND THE PLUNGE, THE PLAN AND WHAT TO DO NOW

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

Yes, there are fundamental reasons of rising interest rates, specter of inflation and overvaluation as concerns about the stock market.

Before the start of the swoon Friday, nine of the 10 categories of inputs to The Arora Report Global Multi Asset Allocation Model were deteriorating. This is the reason that we brought to the attention of our subscribers in bold letters (yelling out for those who were not paying attention) to pay attention to our call to hold 19% – 29% cash or treasury bills and short to medium-term hedges of 15% – 25% and very short term hedges of 15%. This way those who wanted to take less risk and were hedging were protecting 69% of their portfolio. Those who did not hedge did not have as much protection but should have been holding cash more than 29%. Please read on to see what The Arora Report Model is saying now.

The real reason behind the ferocity of selling is not the fundamentals but the penny pickers. These are no ordinary penny pickers; they have been getting rich jumping in front of moving bulldozers to pick pennies. Yesterday they died but in the process hurt good investors who were following the rules. Let us explore with a chart.

The Chart

Please click here for the chart. The chart is of Velocity Shares Daily Inverse VIX Short-Term ETN (XIV) sponsored by Credit Suisse (CS). Similar chart pattern show up in the chart of ProShares Short VIX Short-Term Futures (SVXY).

Chicago Board Options Exchange (CBOE) popularized VIX (VIX). VIX measures volatility expectations from S&P 500 (SPX) index options. There have been a number of ETN products related to VIX that are useful in hedging such as (VXX) and (VXZ). A favorite of day traders has been a leveraged product (UVXY).

Since the Trump election, volatility has been extraordinarily low. Just take a look at the chart of the popular ETFs S&P 500 ETF (SPY), Nasdaq 100 ETF (QQQ), DJIA ETF (DIA) and small cap ETF (IWM). Without understanding that such low volatility is not normal, making money by shorting volatility had become a popular trade. We have always advocated hedging carefully with long volatility products (carefully because they decay and have tracking errors). But we have been cautioning against extensively using inverse volatility products. We have said for a long time that shorting volatility is like picking pennies in front of moving bull dozers. The reason is that volatility can spike at any time and blind side investors and traders. Yesterday this is exactly what occurred. Volatility spiked and those invested in short volatility products got wiped out.

Contagion

By now you may be asking how come trillions of dollars of value can be erased in ferocious selling by these obscure volatility products. By some estimates over a trillion dollars have been tied to volatility related strategies. There is a contagion effect from these instruments that cause some selling as hedges and related strategies take place simultaneously without the market having the ability to smoothly absorb it all. There are also strategies that take risk off (selling in plain English) when volatility spikes over a certain level.

Is Contagion Done?

It is not done as of this writing. At this time nothing can be ruled out. There are some shades of 1987 crash when the market fell 22% in one day. We remember it vividly because we lived through it and lost millions of dollars on that day. The cause at that time was portfolio insurance. We have previously written about six similarities between now and 1987.

The Differences

There are several differences this time that should stem the tide. First there is a much better regulatory regime. Second, earnings are rising. Third, the economy is in great shape. We have previously written about six differences in stocks between today and 1987.

Gold, Oil And Margin Calls

Initially there was a rush out of stocks into gold and oil. For those using ETFs, money was flowing into gold ETF (GLD), silver ETF (SLV), gold miner ETF (GDX) and oil ETF (USO). We stated yesterday before the market open that if the market continued to deteriorate, the momo crowd would get margin calls and they would sell gold and oil. That call has proven spot on.

Short Selling

It is tempting to short sell but it has not been appropriate so far because there is not a good way to control risk. In short selling it is extremely important to control risk. A vicious bounce can happen any time. Stops may not protect as the market can run through them without fills.

What Does The Arora Report Timing Model Say?

The Arora Report timing model is adaptive. In plain English, it means that the model automatically changes with market conditions. Please click here to see how it is done. This model has the very best record of any other model we know of. The model called the 2008 crash. The Arora Report timing model also turned aggressively bullish in March of 2009 which turned out to be the start of this bull market. The model continued to not only stay bullish throughout this long bull market but perfectly called most of the major dips and subsequent buying opportunities during this bull market.

The model also called for buying after the Trump election.

Before the market swoon, the model was calling for a garden variety correction. Right now the model gives very heavy weight to smart money flows. We have been sharing with investors for over a week that smart money was selling into strength and trimming positions. In appropriate services we have provided smart money flows on popular stocks.

Over a week ago, the headline of the Morning Capsule that is made available before the market open to The Arora Report subscribers read, ‘Dollar strengthens and bonds slide to a dangerous level.’ We also stated that smart money was selling stocks due to rising interest rates. The message that the smart money was selling was repeated based on the new data in subsequent Morning Capsules and other posts.

The model is still seeing 80% probability of this being a garden variety correction and a bounce after the correction is over. Please note that this means a 20% probability of it becoming worse.

As an important caution, new data goes into the model every day and thus conclusions from the model can change very quickly. Under these market conditions it is important to stay tuned.

As appropriate, the plan is to start realizing enormous profits that now exist on the hedges, deploy some cash in long positions and selectively short sell. Many desirable stocks and ETFs are likely to come into the buy zones.

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 can turn positive anytime.

Bitcoin has fallen to $7,042.

Bonds have stabilized.  Interest rates are ticking down and bonds are ticking up.

Dollar is slightly weaker but stable

Gold futures are at $1337, silver futures are at $16.68, and oil futures are $63.46.

S&P 500 resistance levels are 2615, 2631 and 2661; support levels are 2594, 2550, and 2500.

DJIA futures are down 156  points.

BONDS STEADY AS STOCKS SLUMP, SMART MONEY STANDING PAT BUT MOMO ON A YO-YO

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

Bonds Steady But Stocks Slump

The selloff in bonds preceded Friday’s sell off in stocks.  This morning bonds are steady but stocks are continuing to slump.  The usual round robin is in play. Stocks in Asia fell because stocks in the U. S. fell.  Stocks in Europe fell because stocks in Asia fell.  Now in the early trade, stocks in the U. S. are falling because stocks in Europe fell.

So far, there have been several attempts to rally stocks in the early trade but they have failed.

Watch ISM

ISM non-manufacturing PMI will be released at 10:00 am.  Market may stabilize if this number is not too hot or too cold.  We will keep a close watch.

Spot On Call

On Monday January 29th, the Morning Capsule stated:

Bonds are now sliding to a dangerous level with yields at the highest level since early 2014.

We have also been writing about rising rates affecting stocks negatively.  On Friday morning, before the market open, we wrote in the Morning Capsule:

Please pay attention to the ‘What To Do Now’ section below.

These calls have been spot on. The real question is where is the market heading now.

Smart Money

We shared with you that recently smart money had been trimming into the strength.  This morning,  smart money is not a seller into the weakness.

Momo On A Yo-Yo

The momo crowd is behaving like a yo-yo.  On Friday when the market was down about 200 points, the momo crowd was aggressively buying.  When the market fell over 600 points, the momo crowd was aggressively selling.

Earlier this morning, the momo crowd was aggressively buying.  As of this writing, the momo crowd is aggressively selling.

The last year has been an exception but in general investors ought to consider not following the momo crowd but following the smart money.

Gold And Oil

Money is flowing out of stocks into gold and oil.  However please be aware that if the market does not bounce, the momo crowd will get margin calls.  To meet the margin calls they will sell gold and oil.

Bitcoin

Bitcoin is under significant pressure.

Technical Patterns

Home builders are tracing a Head and Shoulders Top. This is bearish. The ETF of interest is ITB.

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 can quickly turn positive.

Dollar is steady.

Gold futures are at $1340, silver futures are at $16.85, and oil futures are $65.09.

S&P 500 resistance levels are 2765, 2800 and 2840; support levels are 2740, 2700, and 2688.

DJIA futures are down 221 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 19% – 27% and short to medium-term hedges of  15% – 25% and very short term hedges of 5%.

 

A knowledgeable investor would have turned $100,000 into over $1,000,000 with the help from The Arora Report. NOW YOU TOO CAN ALSO SPECTACULARLY SUCCEED AT MEETING YOUR GOALS WITH THE HELP OF THE ARORA REPORT. You are receiving less than 2% of the content from our paid services. …TO RECEIVE REMAINING 98% INCLUDING MANY ATTRACTIVE INVESTMENT OPPORTUNITIES, TAKE A FREE TRIAL TO PAID SERVICES.

Please click here to take advantage of a FREE  30 day trial.

Check out our enviable performance in both bull and bear markets.

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