Small Caps Signal Recession Worries, Large Caps Hold Up On AI Frenzy

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

Recession Worries

Please click here for a chart of iShares Russell 2000 ETF IWM.

Note the following:

• The chart shows that small caps have accelerated to the downside and are now far away from the downward sloping trendline. This is negative for the stock market.
• The chart shows that small caps have now broken below the support/resistance zone shown on the chart. This is negative for the stock market.
• In contrast to the small caps, large caps are holding up. Here are the reasons for this discrepancy:
  • Small caps are more impacted by a recession than large caps.
  • Large caps are held up by the AI frenzy. The AI frenzy is not helping small caps.
• Small caps are signaling a recession ahead at a time when the momo crowd believes in no landing.
• In addition to small caps, there are other troubling signals. The economy has been held up by excessive spending by the consumer. However, consumer defaults on loans are rapidly increasing, as are bankruptcies.
• In The Arora Report analysis, the liquidity that the consumer has enjoyed is going to become less and less going forward.  
• To add to the troubles, the U.S. government shutdown is looming if both parties cannot come to an agreement.
• UAW is expanding its strike against General Motors Co GM and Stellantis NV STLA. If the strike is prolonged, it will have a negative impact on the stock market.
• Global trade is falling at the fastest rate since 2020. This has a negative economic impact.
• Worries about the Chinese property sector are resurfacing causing stocks in Hong Kong to fall 1.8%.
• On the positive side, there is excitement about Amazon.com, Inc. AMZN investing $4B in AI startup Anthropic. Amazon is trying to follow the same play Microsoft Corp MSFT made with OpenAI, the creator of ChatGPT. OpenAI uses Microsoft’s Azure platform. Anthropic will use Amazon’s AWS cloud platform.
• Anthropic will also use AI chips from Amazon. In the early trade, this is having a negative impact on NVIDIA Corp NVDA and Advanced Micro Devices, Inc. AMD. Even though a fortune is to be made in AI over the next seven years, this illustrates that, at times, it will be treacherous. It is important to completely follow The Arora Report system to minimize risks and maximize returns in AI. It is especially important to follow the Trade Management Guidelines and not get carried away with enthusiasm about AI.  
• As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the protection band.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Amazon and Apple Inc AAPL.

In the early trade, money flows are negative in Nvidia, Microsoft, Alphabet Inc Class C GOOG, Meta Platforms Inc META, and Tesla Inc TSLA.

In the early trade, money flows are mixed in SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust Series 1 QQQ.

Momo Crowd And Smart Money In Stocks

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

Gold

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

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

The most popular ETF for gold is SPDR Gold Trust GLD. The most popular ETF for silver is iShares Silver Trust SLV. 

Oil

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

For longer-term, please see oil ratings.

The most popular ETF for oil is United States Oil ETF USO.

Bitcoin

Bitcoin BTC/USD is range bound.

Markets

Our very, very short-term early stock market indicator is 🔒. 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.

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.