Pay Attention To Change In Stock Market Reaction – Heavy Momo Losses – Hopium For A Rally

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

Change In Market Reaction

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

Note the following:

• The chart shows the stock market has moved above the top band of the support zone.
• RSI on the chart shows the stock market is poised for a rally.
• Even though technically the stock market is poised for a rally, in The Arora Report analysis, the determining factor will be the economic data and earnings that are ahead.  This is a data heavy week.  All of the following has the potential to significantly move the market:
  • Producer Price Index (PPI) will be released tomorrow.
  • Consumer Price Index (CPI) will be released on August 14.
  • Retail sales will be released on August 15.
  • Jobless claims will be released on August 15.
• There are important earnings ahead from Home Depot Inc HD and Walmart Inc WMT. These earnings will give a glimpse of consumer behavior.  As full disclosure, WMT is in the ZYX Buy Model Portfolio from The Arora Report.  The position is long from $19.25 post split.
• In The Arora Report analysis, the market reaction to the news has changed.  In November 2022, Powell triggered the stock market reaction function of bad news is good news and good news is bad news.  This reaction function persisted until mid-July 2024.  Starting in mid-July 2024, the market reaction function has changed – good news is good news and bad news is bad news.  As a reader of The Arora Report, you knew in advance that this change was coming.  We have repeatedly written that the prior market reaction function was highly flawed as it counted on bad news leading to rate cuts but did not consider that bad news also negatively impacts earnings.  Now, the stock market is understanding the reality and has stopped ignoring the fact that bad news leads to bad earnings.    
• Risk and reward are two sides of the same coin in investing.  Smart money takes into account both risk and reward.  In contrast, the momo crowd takes into account only the reward and ignores the risk.  At present, the hopium among the momo crowd is that the upcoming economic data will start a rip roaring rally.  However, prudent investors need to keep in mind that there is no guarantee the upcoming data will turn out as the momo crowd is envisioning.
• Another factor prudent investors need to take into account is that the momo crowd does not have the same fire power it had only a week ago.  The reason is that the momo crowd suffered heavy losses last week even though the stock market has recovered.
  • Due to margin calls, many momo crowd positions were liquidated with heavy losses near the lows last week.
  • The momo crowd had heavily bought weekly call options going into last week. Those call options expired worthless on Friday.

Magnificent Seven Money Flows

In the early trade, money flows are positive in NVIDIA Corp NVDA and Microsoft Corp MSFT.

In the early trade, money flows are neutral in Apple Inc AAPL, Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOG, Meta Platforms Inc META and Tesla Inc TSLA.

In the early trade, money flows are positive 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

There is disappointment that whales did not run up Bitcoin BTC/USD over the weekend.  As a result, bitcoin has dropped below $60,000 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.

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.