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.
THE BIGGEST HEDGE FUND BETS $1.5 BILLION ON STOCK MARKET FALL
To gain an edge, this is what you need to know today.
The Bet
The headline is the world’s largest hedge fund Bridgewater is betting more than $1 billion on stock markets around the world falling by March. Here is how prudent investors ought to think about this with the help of a chart.
The chart
Please click here for an annotated chart of S&P 500 ETF (SPY). Similar conclusions can be drawn from the chart of Dow Jones Industrial Average (DJIA).
Note the following:
- The most important point from the chart is RSI divergence. This is a huge negative. In plain English, divergence in this case means that while the price has gone up, RSI is now at a lower level.
- RSI divergence indicates loss of internal momentum in the market.
- We have previously written that the market is controlled by the momo (momentum) crowd. A big part of buying in the stock market is not due to fundamentals or macro but simply because the market is going up.
- Any signal from RSI is a shorter term signal because it is an oscillator. Oscillators are not very useful for longer term signals in a bull market.
- The chart is a monthly chart to show the longer term trend. The chart includes the crash of 2008.
- From the chart, notice the difference between the stock market performance from 2000 crash to 2008 crash, and from 2008 crash to present.
- The chart shows Arora signal to buy stocks aggressively that occurred just before the historic bottom in 2009. The chart also shows Arora buy signal on Christmas Eve in 2018 which has turned out to be the bottom of this swing.
- The chart shows that volume is low. This indicates lack of conviction.
- A big reason behind the buying in the stock market is performance chase going into the year end and that may be the reason Bridgewater has picked the time for a fall before March of 2020.
- Bridgewater has about $150 billion in assets.
- Apparently Bridgewater has paid about $1.5 billion for put options.
- This means that Bridgewater has used about 1% of its assets to hedge its portfolio.
- Hedge funds typically use sophisticated strategies with many interrelated positions.
- Hedge funds are typically very active and continuously change their assessment of the market. It is conceivable that the headlines you are reading in the media may be old news.
What does it all mean?
Take another look at the chart and two things stand out.
- The stock market has come a long way since the 2009 bottom. Trees do not grow to the sky.
- At present the stock market is extended from the trend line shown on the chart. A pullback to the trend line will cause substantial losses for investors but will not change the secular bull market.
Consider not being lulled in the security of popular large-cap stocks such as Apple (AAPL), Amazon (AMZN), Facebook (FB) and Microsoft (MSFT). These stocks carry heavy weight in indexes. If major selling starts, it will first be in futures and ETFs. Your favorite stocks will get hit irrespective of their individual merits. Especially vulnerable are popular cloud stocks such as Salesforce (CRM), ServiceNow (NOW) and Workday (WDAY). Also vulnerable are semiconductor stocks that have performed well such as AMD (AMD), Micron (MU), NVIDIA (NVDA) and Applied Materials (AMAT).
It is simply common sense that investors ought to do at least the following six:
- Hold a fair amount of cash. We provide specific levels.
- Hold some hedges. We provide specific levels. Investors who are not into hedging, ought to consider holding even more cash.
- Hold cash in money market funds, CDs, Treasury bills or ultra-short bond funds.
- Consider staying away from long dated bonds.
- Diversify into positions that are not among the popular stocks.
- Diversify by time frames.
Europe PMI
The European PMIs are mixed. There is enough there for both bulls and bears
Momo Crowd And Smart Money In Stocks
The momo crowd is aggressively buying stocks in the early trade. Smart money is inactive.
Gold
There is no discernable smart money or momo crowd activity in gold.
For longer term, please see gold and silver ratings.
Oil
The momo crowd is aggressively buying oil. Smart money is lightly selling oil.
For longer term, please see oil ratings.
Marijuana
The momo crowd is aggressively buying marijuana stocks. Smart money is light selling into the strength.
Technical Patterns
Healthcare stocks are tracing a hanging man. This is bearish. ETF of interest is XLV.
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 and can easily swing either way. 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 slightly weaker.
Gold futures are at $1468, silver futures are at $17.12, and oil futures are $58.62.
S&P 500 resistance levels are 3125, 3143 and 3200; support levels are 3100, 3050 and 3020.
DJIA futures are up 46 points.
TARIFF DELAY, CHINA INVITATION FOR MORE TALKS, BILL PASSED TO LIFT FEDERAL BAN ON MARIJUANA
To gain an edge, this is what you need to know today.
Tariff Delay
There are rumors that the U. S. may delay China tariffs set for December 15th. The rumor is triggering aggressive buying in stocks.
Trade
China is inviting the U. S. for a new round of face-to-face talks. This is creating optimism. However one has to ask a simple question, “Until yesterday the consensus was that the deal was almost done and ready to be signed, so why is there a need for a new round of face-to-face negotiations?”
Hong Kong
There are indications that Trump may end up signing the Hong Kong bill because the bill is veto proof.
Jobless Claims
Jobless Claims came at 227K vs. 216K consensus.
FOMC Minutes
FOMC minutes indicate that the Fed is likely to keep interest rates lower for longer.
Momo Crowd And Smart Money In Stocks
The momo crowd was selling stocks in the early trade before the rumor of tariff delay. After the rumor, the momo crowd has switched to aggressively buying stocks. Smart money is inactive.
Gold
The rumor of a tariff delay is triggering selling in gold. The momo crowd is selling gold. Smart money is inactive.
For longer term, please see gold and silver ratings.
Oil
The rumor of tariff delay is triggering aggressive buying in oil on top of a short squeeze.
EIA data on the surface was slightly bullish but digging below the surface and looking at the entirety, the data was bearish. However the headline caused a short squeeze. The short squeeze is continuing this morning.
The momo crowd is buying oil. Smart money is inactive.
For longer term, please see oil ratings.
Marijuana
The House Judiciary Committee voted in favor of the Marijuana Opportunity Reinvestment and Expungement (MORE) Act that aims to lift the federal ban on marijuana. This has created a lot of optimism in marijuana stocks. The big hurdle remains in the Senate. The consensus is that the Senate is not likely to pass the bill.
The momo crowd is aggressively buying marijuana stocks. 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 indeterminable due to a large number of rumors. 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.
Gold futures are at $1471, silver futures are at $17.11, and oil futures are $57.38.
S&P 500 resistance levels are 3125, 3143 and 3200; support levels are 3100, 3050 and 3020.
DJIA futures are up 11 points.
SENATORS SHOW GUTS ON HONG KONG BUT MYOPIC STOCK MARKET INVESTORS DO NOT LIKE IT
To gain an edge, this is what you need to know today.
Hong Kong
The U. S. Senate has unanimously challenged the Chinese government at a critical time for trade talks. In a boost for Hong Kong’s pro-democracy protestors, the Senate has passed the Hong Kong Human Rights and Democracy Act.
Clearly the Senators have the guts to show that for them it is not all about money. However, for the momo (momentum) crowd in the stock market, it is all about money and they hate Senators’ guts. Let’s explore with the help of a chart.
The Chart
Please click here for an annotated chart of Dow Jones Industrial Average (DJIA) ETF (DIA).
Note the following:
- As shown on the chart, the sentiment is very positive but not yet at the extreme. At extreme, sentiment is a contrary indicator. In plain English, when sentiment becomes extremely positive, the stocks tend to fall. The reason is that at extreme sentiment, everybody who is going to buy it has already bought them.
- Apple (AAPL) is a key stock for this market. Sentiment in Apple stock is already approaching extreme positive.
- As shown on the chart, the trend line has not yet been violated but the slightest bad news on trade will make the stock market break the trend line.
- The chart shows the first sign of waning momentum form the RSI.
- The chart shows the volume remains low. Traditionally this indicates lack of conviction and is a negative. Paradoxically, due to the approaching year-end and performance chase, low volume can be a huge positive. The reason is that lagging money managers have not yet fully thrown caution to the wind and started buying.
- China is very sensitive to Hong Kong issue. Sometimes investors forget that China is still a communist country. The biggest risk the communist party faces is if Hong Kong protests are not quelled, the contagion may spread to Mainland China.
- Here is the key question, ‘How will China respond?’ Let’s look at the history. China has made threats but did not do anything substantial against the U. S. on sanctions over human rights in the autonomous region of Xinjiang. In Xinjiang, apparently over one million Muslims are in internment camps by some reports.
- The Senate’s action poses a quandary for President Trump. Will Trump stand up for American values or turn a blind eye to spreading American values in the interest of selling more soybeans and pork to China?
What does it all mean?
There are positive earnings from Target (TGT) and Lowe’s (LOW) after prior weak earnings form Home Depot (HD) and Kohl’s (KSS). Money keeps on flowing in semiconductor stocks such as AMD (AMD), Intel (INTC), Micron (MU) and Broadcom (AVGO). Money also keeps on flowing in mega-caps such as Amazon (AMZN), Facebook (FB), Google (GOOG) (GOOGL) and Microsoft (MSFT).
The probability is high that Trump may not back the Senate and stays focused on getting the phase one of the trade deal done. However, the Congress may not give Trump a choice and Trump may be forced to veto a bill. In this scenario, there are likely to be votes to override his veto.
Investors should not dismiss the Hong Kong issue. Wall Street is assuming that the phase one of the trade deal will be done. If it does not get done, watch out below. Two points we have made previously are very instructive.
- Make no mistake that this market is controlled by the momo crowd. The buying in the stock market is taking place not because of the fundamentals or macro but because the market is going up.
- The scenario can easily switch from performance chase that is causing the upside to locking in profits which will cause a steep drop in the stock market.
FOMC Minutes
FOMC minutes will be released at 2:00 pm and may be market moving.
Momo Crowd And Smart Money In Stocks
The momo crowd is selling stocks in the early trade. Smart money is also lightly selling.
Gold
There is no discernable momo crowd or smart money activity in the early trade.
For longer term, please see gold and silver ratings.
Oil
There is no discernable momo crowd or smart money activity in the early trade.
API data was bearish for oil.
EIA data will be released at 10:30 am ET.
For longer term, please see oil ratings.
Marijuana
The momo crowd is buying marijuana stocks. Smart money is inactive.
There is an upgrade on CGC by a major bank.
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 swing positive on rumors and tweets. 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 slightly stronger.
Gold futures are at $1471, silver futures are at $17.05, and oil futures are $55.76.
S&P 500 resistance levels are 3125, 3143 and 3200; support levels are 3100, 3050 and 3020.
DJIA futures are down 71 points.
PERFORMANCE CHASE CAUSING A MELT-UP, STRONG HOUSING STARTS
To gain an edge, this is what you need to know today.
Performance Chase
Performance chase by lagging money managers is causing a melt-up. In performance chase, lagging money managers throw caution to the wind and start buying best performing stocks in the hopes of meeting their benchmark.
Make no mistake that the buying is all momo crowd and not because of any fundamental or macro reasons even though nobody wants to admit that they are part of the momo crowd.
Housing Starts
Housing Starts came at 1.214 million vs. 1.3 million consensus.
Building Permits came at 1.461 million vs. 1.365 million consensus.
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 acting like a yo-yo in gold. Smart money is inactive.
For longer term, please see gold and silver ratings.
Oil
The momo crowd is selling oil. Smart money is inactive.
For longer term, please see oil ratings.
Marijuana
The momo crowd is selling marijuana stocks. Smart money is inactive.
Marijuana stocks are experiencing significant year-end loss selling. They are very oversold and a rally can start any time.
Technical Patterns
Turkish shares are breaking out. This is bullish. ETF of interest is TUR.
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 start 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. bonds and currencies are range bound.
Gold futures are at $1470, silver futures are at $17.10, and oil futures are $56.41.
S&P 500 resistance levels are 3143 and 3200; support levels are 3100, 3050 and 3020.
DJIA futures are up 38 points.
TRUMP’S IMPEACHMENT AND PERFORMANCE CHASE MAY PUSH DOW JONES TO 30,000
To gain an edge, this is what you need to know today.
Impeachment And Performance Chase
First and foremost I am politically agnostic. My sole objective is to help investors.
What a difference time makes.
When I gave a buy signal on Trump’s election at a time when many were predicting a big stock market drop, it was first met with incredulity. When I called for a high probability scenario of Dow Jones Industrial Average (DJIA) 30,000 in Trump’s first term after his election, I received a ton of hate mail. I have subsequently repeated Dow 30,000 in Trump’s first term several times. Please see prior posts. Now a few years later after my call, Dow 30,000 calls are common place. What is next for the stock market? Let’s examine with the help of a chart.
The chart
Please click here for an annotated chart of Dow Jones Industrial Average ETF (DIA).
Note the following:
- The chart is a weekly chart.
- The chart shows the first measured target of 30,000 and the next target for the stock market above 32,000.
- The stock market often shows symmetry as shown on the chart.
- The weekly chart shows that RSI is overbought but there is room to run. A shallow pullback can happen as RSI on a daily chart is very overbought.
- The chart shows that the volume is low. This indicates the lack of conviction in the rally.
- Paradoxically low volume can lead to an explosive rally because of the upcoming year-end. Money managers who are lagging the stock market may end up throwing caution to the wind and aggressively buying. Investors may want to keep a close eye on large cap tech stocks such as Apple (AAPL), Facebook (FB), Amazon (AMZN) and Microsoft (MSFT). It is also important to keep a close eye on semiconductor stocks such as Intel (INTC), AMD (AMD), Applied Materials (AMAT) and Micron (MU). Please see prior posts.
- If performance chase does not start, the reverse may happen as money managers may attempt to lock in gains. Notice the pullback on Disney (DIS) and Walmart (WMT) stocks after good news. There are early indications that Trump impeachment process in the Congress is energizing Trump’s base.
- Trump is very sensitive to appeasing his base. As an example, Trump has been passionately against vaping and had been looking at a ban on flavored e-cigarettes. After realizing that vaping is popular among his base, Trump appears to be retreating from a strong ban on flavored e-cigarettes. There are reports that no ban may happen.
- Wall Street is already assuming that Trump will get re-elected. As Wall Street notices the energy in Trump’s base, they may run stocks higher. Before Trump’s election, Wall Street had almost unanimously believed that Clinton would be the next president. Of course you may recall that The Arora Report never bought into Hilary Clinton presidency and correctly called Trump’s election.
What Does It All Mean?
As positive as the foregoing may sound, make no mistake that this market is driven by the momo (momentum) crowd. In our analysis at The Arora Report, a majority of the buying is happening because the market is going up and not because of earnings or economic indicators. Therefore it is important to follow a proven adaptive model such as ZYX Asset Allocation Model with inputs in 10 categories. Please click here to see the 10 categories. We provide specific cash and hedge levels as well as positions to hold and buy. Right now the model is calling for holding a fair amount of cash and hedges, and staying cautiously bullish. Keep in mind that the momo crowd is fickle. If the momentum comes down, a drop in the stock market can be swift.
Momo Crowd And Smart Money In Stocks
The momo crowd is acting like a yo-yo in the early trade. Smart money is lightly selling into the strength.
Gold
The momo crowd is acting like a yo-yo in gold. Smart money is inactive.
For longer term, please see gold and silver ratings.
Oil
The momo crowd is acting like a yo-yo. Smart money is inactive.
For longer term, please see oil ratings.
Marijuana
There is no discernable smart money or momo crowd activity in marijuana.
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 easily turn positive based on rumors and news. 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 slightly weaker.
Gold futures are at $1458, silver futures are at $16.77, and oil futures are $57.60.
S&P 500 resistance levels are 3125 and 3143; support levels are 3100, 3050 and 3020.
DJIA futures are down 2 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 22% – 32% and short to medium-term hedges of 5% – 15% and short term hedges of 5% – 15%.
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