Investors Pay Attention To Nvidia, Apple, And Microsoft Divergence; Election Shock In France

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

Market Cap Divergence

Please click here for an enlarged chart of Invesco S&P 500 Eql Wght ETF RSP compared to SPDR S&P 500 ETF Trust SPY which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

  • The chart shows that for the period shown on the chart, equal weighted S&P 500 has lost 1.94%, while cap weighted S&P 500 has gained 6.96%.  This indicates that S&P 500 is being driven by mega caps.
  • Investors need to be mindful that the top ten stocks in S&P 500 by capitalization are responsible for 35% of the market capitalization.  The top ten stocks are Apple Inc AAPL, Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOGAlphabet Inc Class A GOOGL, Meta Platforms Inc META, Microsoft Corp MSFT, NVIDIA Corp NVDA, Tesla Inc TSLABerkshire Hathaway Inc Class B (NYSE: BRK-B), and UnitedHealth Group Inc UNH.  However, these top ten stocks are responsible for only 23% of the earnings.
  • The driving force behind nine of the top ten stocks is the AI frenzy.
  • In The Arora Report analysis, the divergence between market capitalization and earnings is the greatest in recent memory.  This indicates the following:
    • Future earnings expectations from the top ten stocks are extraordinarily high.
    • There is significant risk to this market if these extraordinarily high expectations are not met.  
  • Sentiment continues to be extremely bullish.
  • In the early trade, there is buying, mostly by retail investors based on the weekend pump.
  • The foregoing is an example of quantitative analysis.  Prudent investors use 360 degree analysis such as the one provided by a combination of ZYX Change Method and the adaptive ZYX Asset Allocation Model with inputs in ten categories. The best results are obtained by combining the best elements of quantitative analysis, macro analysis, fundamental analysis, and technical analysis.
  • Technical analysis of this market continues to be very bullish.
  • Macro analysis and fundamental analysis show risks.
  • 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. The protection band is one of the large number of unique edges that are available to members of The Arora Report.

France

There is a shocker in the French election results.  Polls were projecting the far right National Rally to be the largest winner.  In a surprise, far left parties won the most seats.  The far left’s total of 182 seats falls short of the 289 majority required to form a government.   France appears to be entering an era similar to Italy.  In The Arora Report analysis, for investors these results are better than if the far right would have won an absolute majority.

Magnificent Seven Money Flows

In the early trade, money flows are positive in AAPL, AMZN, NVDA, MSFT, GOOG, and META.

In the early trade, money flows are negative in TSLA.

In the early trade, money flows are neutral in SPY and Invesco QQQ Trust Series 1 QQQ.

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust GLD.  The most popular ETF for silver is iShares Silver Trust SLV.  The most popular ETF for oil is United States Oil ETF USO.

Bitcoin

Bitcoin BTC/USD is range bound and trading around $57,000.

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.

A protection band of 0% would be very bullish and would indicate full investment with 0% in cash.  A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.

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.

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