Bulls Encouraged By Stimulus From China, Strength In Djia, And Finally Good Earnings

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

Bulls Encouraged

Please click here for a chart of SPDR Dow Jones Industrial Average ETF Trust DIA.

Note the following:

• The chart shows that the Dow Jones Industrial Average has gone straight up in the month of July.
• Strength is spreading from the magnificent seven to other large cap stocks in the Dow Jones Industrial Average. The magnificent seven stocks are Apple Inc AAPL, Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOG, Meta Platforms Inc META, Microsoft Corp MSFT, NVIDIA Corp NVDA, and Tesla Inc TSLA.
• The trendline on the chart shows that the slope is steep. Historically, such a steep slope is not sustained.
• RSI on the chart shows that the market is very overbought.
• In The Arora Report analysis, the primary reason for strength in the Dow Jones Industrial Average is not the macro or the fundamentals but a rush to buy the laggards in the stock market.
• Yesterday, we shared with you in the Morning Capsule:

To date, about 20% of S&P 500 companies have reported earnings. These earnings are down about 9% from the prior year.  As earnings have fallen, the stock market has gone up on PE expansion.

•  This morning, the story on earnings is better beyond tech stocks.
  • General Motors Co GM is raising its profit targets by at least $1B, and its second quarter earnings beat the consensus on pent up demand for large SUVs and pickups.
  • General Electric Co GE is raising its guidance, and second quarter earnings are better than the consensus as pent up demand for travel increases sales of jet engines.
  • Paint maker Sherwin-Williams Co SHW reported great earnings on strong demand for paint.
• The enthusiasm from a rally in the Chinese stock market is spilling over into the U.S. China is signaling stimulus to increase consumption and also for real estate.
• Investors are eagerly waiting for earnings from Microsoft Corp MSFT and Alphabet Inc Class C GOOG that will be released after the market close.
• The FOMC meeting is starting today. The Fed will announce its rate decision tomorrow.
• Historically, the momo crowd buys ahead of the Fed.
• Sentiment continues to be very positive, bordering on extreme but has not yet reached extreme. We previously shared with you:

Going into the critical week, sentiment is very positive, bordering on extreme. When sentiment reaches extremely positive, it is a contrary signal.  In plain English it means time to sell.  As a reminder, sentiment is not a precise timing indicator.  In general, you want to buy when sentiment is extremely negative, and take profits when sentiment is extremely positive.

• The Conference Board's Consumer Confidence Index will be released at 10am ET and may be market moving. The consensus is 111.5.
• 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 inactive in the early trade. Smart money is inactive in the early trade.

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

Oil

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

For longer-term, please see oil ratings.

Bitcoin

Bitcoin BTC/USD continues to trade below $30,000.

Markets

Our very, very short-term early stock market indicator is neutral. 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 🔒 in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. This is a good way to protect yourself and participate in the upside at the same time. To see the locked content, please click here to start a free trial.

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.