Momo Crowd Reacts To Earnings By Ignoring The Bad And Buying On Hope

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

Ignoring The Bad

Please click here for a chart of Charles Schwab Corporation Common Stock SCHW.

Note the following:

• The Morning Capsule is about the big picture, not an individual stock. The chart of SCHW is being used to illustrate the point.
• The chart shows that SCHW stock fell during the banking crisis in March 2023.
• There was no danger of Schwab going bankrupt like Silicon Valley Bank. Schwab is an excellent company. The reason the stock fell in March was that the momo crowd finally figured out what prudent investors already knew. Schwab made a lot of money by paying zero or near zero interest to customers for cash in their accounts while it earned interest on that cash for itself. Investors were rapidly moving their money to earn interest. This was going to reduce Schwab’s earnings.
• As shown on the chart, the fall in SCHW stock illustrates what happens when the momo crowd discovers something negative that was already well known.
• Yesterday, SCHW reported earnings in the premarket. Earnings were mixed.
• Initially, the stock traded around unchanged for a while in the premarket. Then the stock took off and opened higher in the regular session as shown by the chart.
• In the end, SCHW closed up 12.57% and is higher in the premarket as shown on the chart.
• The reaction to Schwab’s earnings illustrates that the momo crowd is buying on hope that future earnings will be better, and they are ignoring the negatives in the reported earnings. This applies to not only Schwab, but all the earnings reported so far this quarter.  
• The foregoing shows that investors have become complacent about the reality, and sentiment is playing a big role in buying.
• Let us see how investors react to more earnings as they come in. This morning Goldman Sachs Group Inc GS reported earnings. So far in the premarket, investors are buying on hope, and as a result, the stock has fallen only 1.5% even though there are a lot of negatives in the earnings.
• Important earnings from Tesla Inc TSLA, Netflix Inc NFLX, and IBM Common Stock IBM will be reported after the market close. How investors react to these earnings will be a tell.
• Investors should also carefully watch Microsoft Corp MSFT stock. As we wrote in the Afternoon Capsule, MSFT stock was rocketing on Microsoft pricing its AI Copilot for Office 365 at $30 per month. We previously wrote:

The very aggressive pricing from MSFT is in line with our expectations. However, it is significantly higher than market estimates.

• Microsoft's announcement accelerated the AI frenzy, and the positive sentiment from the AI frenzy carried through to Apple Inc AAPL, Meta Platforms Inc META, NVIDIA Corp NVDA, and Alphabet Inc Class C GOOG.
• As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

Momo Crowd And Smart Money In Stocks

The momo crowd is buying stocks in the early trade. Smart money is inactive in the early trade.

Gold

The momo crowd is buying gold in the early trade. Smart money is inactive in the early trade.

For longer-term, please see gold and silver ratings.

Oil

API crude oil inventories came at a draw of 0.797M barrels vs. a consensus of a draw of 2.25M barrels.

The momo crowd is buying oil in the early trade. Smart money is inactive in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin BTC/USD is staying below $30,000 as of this writing.

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.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding 21% - 39% in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 3% - 6%, and short term hedges of 5% - 8%. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges. The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive. If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash. When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks. High beta stocks are the ones that move more than the market.

Traditional 60/40 Portfolio

Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less. Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.

The Arora Report is known for its accurate calls.  The Arora Report correctly called the 2008 financial crash, the start of a mega bull market in 2009, the COVID crash, the post-COVID bull market, and the 2022 bear market.  Please click here to sign up for a free forever Generate Wealth Newsletter.