$5 Trillion Worth Of Quad Witching, AI Leading To Revivial Of Nuclear Power

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

Nuclear Power Revival

Please click here for an enlarged chart of Constellation Energy Corp CEG.

Note the following:

  • This article is about the big picture, not an individual stock.  The chart of CEG is being used to illustrate the point.
  • To feed the power hungry AI data centers, Microsoft Corp MSFT is signing a power purchase agreement with CEG.
  • The chart shows the gap up on CEG news.
  • The chart shows that CEG is in the resistance zone.
  • RSI on the chart shows that CEG is very overbought.  An overbought stock tends to pullback.
  • Based on the quantitative screen of The Arora Report's ZYX Change Method, CEG is way overvalued at this time.  However, CEG will benefit from AI, and as such, it is on our radar to give a signal when it is appropriate.
  • To provide the power, CEG will restart Three Mile Island Unit 1.  This reactor was shut down about five years ago due to economic reasons.  Three Mile Island Unit 2 is famous for a partial melt down, which caused the most serious nuclear accident on U.S. soil.  In addition to CEG, there are opportunities in other energy producers that will help meet the massive power demand for AI.
    • Quanta Services Inc PWR is a contractor to electric utilities and is benefiting from the AI power demand.  As full disclosure, PWR is in The Arora Report’s ZYX Buy Core Model Portfolio. PWR is long from $37. 
    • First Solar Inc FSLR, which provides solar power to data centers. As full disclosure, FSLR is in The Arora Report’s ZYX Buy Core Model Portfolio.
    • A new name that is on The Arora Report’s radar is Vistra Corp VST. As full disclosure, a signal may be given when appropriate.
  • We shared with readers yesterday that quad witching was to the upside.
    • A part of the strength in the stock market yesterday was due to quad witching and not due to the Fed's 50 bps interest rate cut.
    • About $5 trillion notional value of stock derivatives are expiring today.  This is a huge amount but not a record.
    • This morning, expiring futures are exerting downward pressure on the market after yesterday's runup.  Futures are expiring this morning.
    • Options will expire in the afternoon.
  • Historically, gains due to quad witching tend to reverse in the following week and sometimes even on the expiration day.

Japan

In a relief to U.S. stock investors, the Bank of Japan (BOJ) left interest rates unchanged.

Magnificent Seven Money Flows

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

In the early trade, money flows are neutral in Apple Inc AAPL, Amazon.com, Inc. AMZN, Meta Platforms Inc META, and MSFT.

In the early trade, money flows are negative in NVIDIA Corp NVDA, and Tesla Inc TSLA.

In the early trade, money flows are negative in SPDR S&P 500 ETF Trust 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

Trump's advocacy continues to bring buying into Bitcoin BTC/USD. Here is the key question: Will bitcoin whales take advantage of the strength to sell as is their pattern?

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 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 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.

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