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.
STOCK MARKET MAY DROP 20% IF BIDEN PLAN ENACTED BUT THESE TWO FACTORS MAY CAUSE NEW HIGHS
To gain an edge, this is what you need to know today.
Whiff Of Deflation
Core PPI came at -0.3% vs. +0.1% consensus. This indicates a whiff of deflation. There is much debate if the economy is heading towards inflation or deflation. For prudent investors, it is important to keep an eye on the new data.
Biden Plan
This stock market is controlled by the momo (momentum) crowd. Driven by the excessive borrowing by politicians and the excessive money printing by the Fed, there is excessive money in momo crowds’ hands. They keep on buying stocks not because of a good economy or good earnings or good valuations or sound economic underpinnings of the country, but because the stock market is going up.
While the momo crowd in the stock market is focused on the momentum of the stock market, prudent investors should start focusing on the election. Biden has just released his ‘Buy American’ economic plan. Biden has done a good job with this plan to challenge Trump. Prudent investors need to ask how will Biden pay for his plan. Part of the answer is taking away Trump’s tax cuts for corporations and the rich. The second part of the answer appears to be the same for both Biden and Trump for their plans — borrow more and influence the Fed to print more.
My long time readers know I am politically agnostic. My sole job is to help investors. 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 popular stock market index Dow Jones Industrial Average (DJIA).
Note the following:
- The chart is a monthly chart giving investors a long term perspective.
- The chart shows the middle support zone.
- The chart shows that based on Biden’s tax policies, in theory the stock market should drop to the middle buy zone. This is about a 20% drop in the stock market.
- Prudent investors should protect themselves from the tail risk of the stock market falling to the ‘mother of all support zones’ shown on the chart.
- The chart shows Arora buy signals and calls for the Dow Jones Industrial Average to reach 30,000 points when no one was talking about such a high number for the stock market. From 2012 to this point in time, the majority of the rise in the stock market is attributable to the rise in the Fed’s balance sheet and lower interest rates. I was one of the very few who correctly called both Trump election and subsequent stock market rise.
- The big money is hiding in five large-cap tech stocks of Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOG) (GOOGL) and Facebook (FB). These five stocks are experiencing significant ‘pile on’ effect — almost daily buying to pay up higher and higher for these stocks without any fundamental developments to take advantage of almost free money that is floating around.
- Keep an eye on stocks that will benefit from Biden plan. Examples include Tesla (TSLA), Canopy Growth (CGC) and Centene (CNC).
Five Contributors To Stock Market Drop
Here is a simple calculus of what in theory should happen with Biden’s tax policy.
- Biden is likely to increase the capital gains tax. Perhaps as high as 39% for the upper income individuals. In theory, there should be a lot of selling to take advantage of the present 20% capital gains tax for high income individuals. High income individuals are also subject to additional 3.8% Net Investment Income tax that was put in place to finance Obamacare.
- Due to higher corporate tax rates, S&P 500 earnings may take about 7% hit.
- Due to more regulation S&P 500 earnings may take 2 – 3% hit.
- Potential restrictions on buybacks and also less free cash flow due to higher corporate taxes will be a negative for the stock market.
- With wealthy individuals paying more taxes, they will have less money to buy stocks.
All in all, the foregoing calculates to about 20% hit to the stock market.
New Stock Market Highs
None of the foregoing may matter and the stock market may hit new highs if the following two factors take hold:
- If Biden starts surging in the polls along with the possibility of a blue sweep, expect market professionals and hedge funds to build up short positions. Short positions act as fuel for a rally if subsequently a short squeeze takes hold. The chart linked above shows the 65% of the first leg of the rally from March 23 coronavirus low was short squeeze related. The chart shows that the second leg of the rally was 35% short squeeze related. If a short squeeze takes hold again, it can easily take the stock market to new highs.
- An up move due to short squeeze these days goes a lot farther due to the momo crowd jumping on. The momo crowd has already formed a habit of buying stocks aggressively on the news of more borrowing and more money printing. With more borrowing under the Biden administration, the prevailing wisdom among the momo crowd that more borrowing and more money printing is good may lead to new stock market highs.
What Does It All Mean?
Prudent investors need to stay extra alert and nimble as well as have protective measures in place while positioned to take advantage of potential new stock market highs. Protective measures should be dynamically adjusted. Of course if you are part of the momo crowd, it is real easy — celebrate borrowing and money printing with more buying in the stock market.
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 buying gold in the early trade. Smart money is inactive.
For longer term, please see gold and silver ratings.
Oil
The momo crowd is 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 negative but expect the momo crowd to push the stock market 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 $1813, silver futures are at $19.15, and oil futures are $39.74.
S&P 500 futures resistance levels are 3155, 3182 and 3228: support levels are 3124, 3114 and 3075.
DJIA futures are up 10 points.
JOBLESS CLAIMS SHOW IMPROVEMENT
To gain an edge, this is what you need to know today.
Jobless Claims
Weekly Initial Jobless Claims came at 1.314M vs. 1.35M consensus. Lower initial claims means that jobs are picking up and the economy is getting stronger. This is a leading indicator and carries heavy weight in our models.
Politicians
Interestingly as data has become stronger and stronger, it has not stopped politicians from wanting to borrow more money and print more money. Unfortunately, politicians are the leaders and have public support behind them for borrowing and printing. Politicians are simply not looking at the damage they are doing to the country in the long run. They are just too focused on the next election.
For investors this means that this stock market does not have strong underpinnings and the risk is much higher than generally believed.
China Rally
The rally in Chinese stocks continues. Over night Shanghai Composite was up 1.4% on top of large gains this week.
Momo Crowd And Smart Money In Stocks
The momo crowd is aggressively buying stocks in the early trade. Buying is especially aggressive in momo crowds’ favorite tech stocks. Smart money is inactive.
Gold
The momo crowd is lightly buying gold in the early trade. Smart money is inactive.
The momo crowd is aggressively buying silver.
For longer term, please see gold and silver ratings.
Oil
The momo crowd is 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 negative, expect the market to open slightly higher, technology stocks to open much higher and momo crowd to attempt to push everything 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 $1819, silver futures are at $19.35, and oil futures are $40.84.
S&P 500 futures resistance levels are 3182, 3228 and 3278: support levels are 3155, 3124 and 3114.
DJIA futures are down 8 points.
SILVER ON THE VERGE OF A BREAKOUT, MOMO BUYING UNDETERRED, BEARISH DATA ON CRUDE OIL
To gain an edge, this is what you need to know today.
Prospects Of Virus Getting Out Of Control
The latest data is showing that the prospects of the virus getting out of control are rising. Also there are reports of mutations that can potentially make an effective vaccine more difficult.
The momo crowd is undeterred in their buying.
Momo Crowd And Smart Money In Stocks
The momo crowd is buying stocks in the early trade. Smart money is inactive.
Gold
Please click here for a chart of silver. Silver is on the verge of a breakout. This is important for the following reasons:
- Silver moves in sympathy with gold.
- Silver is an industrial metal.
- For silver to move, there have to be expectations of good industrial growth.
- Silver is not a replacement for fiat currencies.
- When silver starts moving, it will typically move 80% more than gold.
- There is no call to buy silver at this time because as the chart shows there is resistance overhead.
- The momo crowd is aggressively buying silver this morning.
The momo crowd is aggressively buying gold. Smart money is inactive.
For longer term, please see gold and silver ratings.
Oil
API data showed a build of 2.048M barrels vs. consensus of a draw of 3.114M barrels. This data is highly bearish. However the momo crowd is buying oil. Oil price has also become divorced from reality just like the stock market due to momo crowd buying.
Smart money is lightly 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 momo crowd to try to run it up. 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 slightly weaker.
Gold futures are at $1814, silver futures are at $18.80, and oil futures are $40.75.
S&P 500 futures resistance levels are 3155, 3182 and 3228: support levels are 3124, 3114 and 3075.
DJIA futures are up 22 points.
THE TINIEST SLIVER OF SANITY BEGINS TO EMERGE
To gain an edge, this is what you need to know today.
Tiniest Sliver Of Sanity
For a change, the tiniest sliver of sanity is beginning to emerge in the early morning. It is given that the momo crowd will attempt to crush it; lets see if they succeed.
Last week, we wrote in ZYX Short,
Starting Tuesday of next week, there should be a down trend if there is no new good news such as on vaccine or resurgence of virus subsiding.
The reasons behind that call are being talked about on Wall Street this morning. The new quarter money has already been invested. Earnings are ahead. Will investors look past the earnings dip one more time like they did during the last quarter? On the negative side, the stock market was nowhere near as high as it is now during the last earning season. On the positive side for the market, the momo crowd is more confident than the last quarter in buying stocks that are galloping higher. Moreover on the positive side for the stock market, ranks of the momo crowd have swelled primarily with investors who have less experience. The age old truth is that the more experience investors have the more careful they become.
Momo Crowd And Smart Money In Stocks
The momo crowd is buying stocks in the early morning trade. Smart money is selling stocks.
Gold
The momo crowd is selling gold in the early trade. The momo crowd is disappointed that gold has pulled back from the psychological resistance level of $1,800.
Smart money is inactive.
For longer term, please see gold and silver ratings.
Oil
The momo crowd is 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 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 $1785, silver futures are at $18.34, and oil futures are $40.40.
S&P 500 futures resistance levels are 3155, 3182 and 3228: support levels are 3124, 3114 and 3075.
DJIA futures are down 219 points.
CHINESE BUYING, BEFORE BUYING OR SELLING IN THIS STOCK MARKET, PAY ATTENTION TO ARTIFICIAL INTELLIGENCE LEMONADE
To gain an edge, this is what you need to know today.
Chinese Buying
Now in addition to the Fed and the momentum, there is a brand new reason to inflate the stock bubble. The new reason is a signal from the Chinese government.
Chinese stocks soared. Economic data from China is getting better but not near enough to justify a 5.7% up move overnight on top of the already rapidly rising stock market in China.
The reason behind the latest rise is the Chinese government signaled Chinese investors to buy. After all it is a controlled economy with a high compliant population. The surprise is that European and American investors are following the Chinese in buying.
The stock market is complex. Many investors are having difficulty making buying and selling decisions in the stock market. Calling this stock market artificial intelligence lemonade market will help investors quickly develop an understanding of this stock market and how to proceed with buy and sell decisions. Let us first build the foundation with the help of a chart before discussing the lemonade aspect.
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:
- The chart shows the latest buying in the stock market from Chinese euphoria. Chinese government signaled that it is a good time to foster a bull market in stocks. Of course the Chinese people complied running up the Shanghai Composite Index 5.7% in its biggest up move since 2015.
- In round robin buying, European investors followed the Chinese and when their turn came, investors in the U. S. are also following the Chinese aggressively.
- The chart shows that before the great recession of 2008, the Fed’s balance sheet stood at $0.87 trillion.
- The chart shows that in March 2009, when a major Arora buy signal was given, the Fed’s balance sheet stood at $2.08 trillion. With the benefit of hindsight, this also turned out to be the start of the long bull market.
- The chart shows Arora buy signals and calls for Dow Jones Industrial Average to reach 30,000 at a time when nobody else was projecting Dow Jones Industrial Average to go that high. From 2012 to this point in time, the majority of the rise in the stock market is attributable to the rise in Federal Reserve’s balance sheet and lower interest rates. This call was subsequently repeated several times.
- My long time readers already know that I am politically agnostic. My sole job is to help investors. I was one of the very few who called Trump election correctly and subsequent stock market rise correctly at a time when most were calling for the stock market to fall if Trump got elected and were prematurely anointing Hilary Clinton as president. Even though Biden is gaining in some polls, it is too early to call the election. However investors should consider various scenarios.
- After Trump’s election, a big part of the rise in the stock market is attributable to the rise in the Fed’s balance sheet, tax cuts and reduced regulation.
- If Biden gets elected, he is committed to taking most of Trump’s tax cuts back and there will be a rise in regulation. In theory, a large part of the gains in the stock market should disappear if Biden does what he says.
- The chart shows that the stock market touched the ‘mother of all support zones’ on coronavirus scare and then rebounded strongly. The main force behind the rebound has been Fed’s expanding balance sheet and the government borrowing heavily for stimulus programs. The chart shows that now the Fed’s balance sheet is about $7 trillion on its way to $10 trillion.
- A major contribution to the stock market has been made by big money hiding in the big five tech stocks of Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOG) (GOOGL) and Facebook (FB). A significant part of the rise in these five stocks is due to their price earnings multiple expansion and not due to fundamentals.
Artificial Intelligence Lemonade Stock Market
With the foregoing foundation, now you can easily understand why it is appropriate to call this stock market artificial intelligence lemonade stock market. Here are the key points:
- Lemonade (LMND) is by some measures the most successful IPO of 2020.
- To become the most successful IPO, Lemonade did not find a cure for coronavirus or cancer. Lemonade sells simple homeowners and renters insurance mostly at the very low end. They do not seem to be set up to deal with complexities of insurance beyond the low end.
- Lemonade priced its IPO at $29 a share, higher than the already increased range of $26 to $28. Previously the range was $23 to $26 per share. This shows the high demand for the stock.
- After the IPO, during the first day of trading Lemonade stock reached a high of $70.80 and closed at $69.41. You must be thinking that for the stock of a company that mostly sells insurance at the low end, such heavy demand from buyers means that the company has dominate market share, billions in revenues and hefty profits. You could not be more wrong.
- In 2019, the company generated only $67.3 million in revenues and lost $108.5 million. A typical insurance company would be in danger of going bankrupt with these kinds of numbers. But it is a virtue for lemonade.
- It is in fashion these days to blame some of the insanity of the market on Robinhooders. Robinhood is a broker and some believe that Robinhood’s clients just do not know enough and keep on running stocks up based on social media and momentum.
- Lemonade is no Robinhooder stock. It has been brought public by the cream of Wall Street including Goldman Sachs (GS) and Morgan Stanley (MS). Its investors include famous firms such as SoftBank (SFTBY) and Sequoia Capital.
- At its first trading day closing price, Lemonade was worth $3.81 billion. This translates to price/sales ratio of over 56. No, it is not price earnings ratio — there are no earnings.
- Warren Buffett is in the insurance business. Buffett’s company Berkshire Hathaway (BRK.B) gets price/sales ratio of 1.84. If you have followed Warren Buffett for years, can you see Warren Buffett paying even one-quarter of the present price for this stock? Buffett’s is busy buying natural gas assets of Dominion Energy (D) at a great price.
- Why are investors so enthused? They remember that Amazon was just a book seller once upon a time and incurred heavy losses — the inference, perhaps mistaken, is that heavy losses to generate growth are always a good thing. Lemonade has reimagined the insurance for the digital age. You can buy insurance from your phone. You do not need a broker.
- In late 1990’s, companies achieved sky high valuations because they had .com in their names. In many cases, all they had to do is to announce that they were going to have a new website and the stocks jumped. Investors did not need to know anything else.
- Today’s monikers are artificial intelligence, big data and reimagining. Lemonade has all three. It uses artificial intelligence and big data to make decisions and is reimagining a big market.
The Bubble
If you are one of those who still do old fashioned cold analytical analysis based on numbers, the stock market significantly above the mother of support zones shown on the chart is a bubble at this time.
Lemonade and Chinese are showing us that the bubble is likely to get bigger. To make money in this market, investors need a new mindset. The mindset is easier to develop once you start calling this stock market ‘artificial intelligence lemonade market’. As a note of caution, it is extremely important to keep various protective measures in place and stay nimble because there is a tail risk of the bubble busting. The alternative is to miss out on gains. There are always opportunities even for old fashioned prudent investors.
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 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 weaker.
Gold futures are at $1795, silver futures are at $18.63, and oil futures are $40.66.
S&P 500 futures resistance levels are 3182, 3228 and 3278: support levels are 3155, 3124 and 3114.
DJIA futures are up 374 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 29% – 37% in cash or treasury bills or short term bond funds or allocated to short term tactical trades and short to medium-term hedges of 3% – 8% and short term hedges of 3% – 10%. This is a good way to protect yourself and participate in the upside at the same time.
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