Very Large $5 Trillion Quadruple Witching, Microsoft Breaks Out, Whales Liquidate $500M Of Bitcoin

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

Very Large Quadruple Witching

Please click here for an enlarged version of the chart of Microsoft Corp MSFT.

Note the following:

• This article is about the big picture, not an individual stock. The chart of MSFT stock is being used to illustrate the point.
• Microsoft is the second most important stock to the stock market after NVIDIA Corp NVDA.
• The chart shows MSFT stock has broken out.
• MSFT stock is breaking out at a time when NVDA stock is pulling back.
• The chart shows the breakout was on heavier volume. This indicates conviction in traditional technical analysis.
• In The Arora Report analysis, the breakout is suspect for three reasons:
  • There does not appear to be any significant fundamental development that would cause the breakout.
  • Money is moving out of NVDA and into MSFT, but this may be temporary.
  • There appears to be a gamma squeeze related to quadruple witching. Gamma squeeze is an important market mechanic. Understanding gamma squeeze can give investors an edge.
• Today is quadruple witching.  In quadruple witching, stock index futures, futures options, stock options, and single stock futures expire. Quadruple witching often leads to volatility.
• This is a very large quadruple witching with about $5T of notional value of contracts expiring. 
• A vast majority of the contracts expiring are call options. Call options are bullish bets.
• Historically, when such a large amount of call options expire, the market tends to pull back the week after. However, the markets always have crosscurrents. Next week is the FOMC meeting. The momo crowd tends to buy aggressively on hopium prior to the Fed announcing the results from the FOMC meeting. Here is the key question “Will the downward drag from quadruple witching be overcome by momo crowd hopium buying?”
• In a notable development, the stock of Adobe Inc ADBE, an AI darling, is falling on weak guidance. The guidance is weak because of increasing AI competition. This development shows the wisdom of what we started sharing with you in 2022 – a fortune is to be made in AI, but it will not be a straight line.  We also shared with you that at times it will be treacherous as many companies will be disrupted by AI. Adobe is an example where AI from OpenAI is hurting AI products from Adobe.  It is extremely important that investors become knowledgeable about AI.
• University of Michigan consumer sentiment survey results will be announced at 10am ET. This may be market moving.
• 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.

Japan

We have been sharing with you that the policies of Bank of Japan (BoJ) impact stock markets across the globe, including the U.S. stock market.  The largest union group in Japan just negotiated higher wages than expected. The developing narrative is that Bank of Japan may use the union deal to abandon its negative interest rate policy. The Bank of Japan meeting takes place next week.

Magnificent Seven Money Flows

In the early trade, money flows are neutral in Apple Inc AAPL, Amazon.com, Inc. AMZN, Meta Platforms Inc META, and Microsoft Corp (MSFT), Tesla Inc TSLA. and NVIDIA Corp (NVDA).

In the early trade, money flows are negative in Alphabet Inc Class C GOOG.

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 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

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

Yesterday, Bitcoin BTC/USD touched a new high of $73,798 on retail buying. Yesterday, PPI data showed hotter inflation. Even though the hype machine tries to convince mom and pop that bitcoin is an inflation hedge, the reality is that it is not. Bitcoin whales know that bitcoin is not an inflation hedge, so they took advantage of the strength to liquidate about $500M of bitcoin, causing bitcoin to drop. Bitcoin is trading around $68,000 as of this writing.

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 a protection band consisting of cash or Treasury bills or short-term tactical trades as well as short to medium term hedges and short term hedges. 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 seven 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 big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, the DJIA rally to 30,000 when it was trading at 16,000, the start of a mega bull market in 2009, and the financial crash of 2008. Please click here to sign up for a free forever Generate Wealth Newsletter.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.