Iran Warning Stops The Market Rally Buy Historic Biden Visit To Israel Is A Positive For The Market

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

Consumer Spending Binge

Please click here for a 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 a big rally in the stock market yesterday. The rally was triggered by callous calculation by Wall Street. Please read yesterday’s Morning Capsule to learn more about the callous calculation.
• The chart shows that RSI has quickly become overbought. Even though overbought markets are vulnerable to a pull back, in the complete context of volume and price action, this quick move up in RSI is a positive for the market.
• The chart shows that the market is consolidating above the top band of the top band of the support zone. This is a sign of technical strength. The primary reason behind the strength are the two market mechanics.
  • The market mechanic of positioning is to the upside.
  • The market mechanic of year end chase is to the upside.
• Market mechanics are powerful. About two-thirds of the market rise this year is due to market mechanics. Understanding market mechanics can give you a big edge. Due to their high value, most of the knowledge about market mechanics is kept close to the chest of Wall Street professionals. The best way to learn about market mechanics is to listen to the podcast in Arora Ambassador Club.

• The new data on consumer spending is unexpectedly strong. The US economy is 70% consumer based, therefore prudent investors pay attention to retail sales. Here are details of the new data:
  • Headline retail sales came in at 0.7% vs 0.3% consensus. 
  • Retail sales ex-auto came in at 0.6% vs 0.2% consensus.
• In The Arora Report analysis, the reason retail sales continue to stay strong is due to the free money distributed by the Federal government through a number of programs during the pandemic. Now even though the headlines of free money have faded, the money that the Federal government borrowed and spent is still in the system. Further there is unprecedented spending by the Federal government under the Inflation Reduction Act and Infrastructure Act. The money from these two acts will continue to flow for years.  Wealthy consumers still have significant savings, low end, and middle class consumers are borrowing more and charging more to their credit cards. Since consumers got into the habit of spending more, they are not likely to change that behavior until the money in the system starts drying up.
• Yields are rising after the release of retail sales data.
• Yesterday in the Morning Capsule we shared with you that the Biden Administration was tightening restrictions against China. It should have impacted many stocks such as NVIDIA Corp NVDA but it did not as investors aggressively bought on Wall Street's callous calculation. In the Afternoon Capsule we wrote:   

Investors are back in the mode of bad news is good news. Periodically the market gets in the mode of investors buying any stock that has news, good or bad. Today is one of those days. Investors are aggressively buying any company with news.

• Today investors are noticing the new restrictions and they are selling stocks such as NVDA in early trade. It is not uncommon for markets to have delayed reactions especially when investors get in the euphoria mode like they did yesterday.
• President Biden, in a historic first, will be visiting Israel tomorrow. This is the first visit ever by a US president to Israel in wartime. Here are the key points of Biden’s visit:
  • The purpose of Biden’s visit is to show complete solidarity with Israel.
  • Biden’s visit is designed to deter Iran and Hezbollah from opening a northern front in Israel.  
  • There are reports that Biden has reached a deal with Israel Prime Minister Netanyahu to provide help to Palestinians in the Gaza Strip. 
  • To help with humanitarian aid and to contain the conflict Biden will also be visiting Jordan. In Jordan, he will meet with the Egyptian President Abdel Fateah El-Sisi and the Palestinian President Mahmoud Abbas. 
• In The Arora Report analysis, prudent investors need to keep a close eye on the new warning from Iran of a potential preemptive action against Israel.
  • Hezbollah and Israel have been engaged in firing at each other raising tensions. 
  • The warning from Iran has stopped the stock market rally in its tracks.
  • To reduce risk, many institutions seem to be selling on this warning.
• In The Arora Report analysis, among the earnings released this morning so far, Bank of America Corp BAC earnings are the most important. The reason is Bank of America has a large consumer deposit base and thus has good visibility into consumer behavior. Bank of America is saying that consumer spending is slowing. In spite of a drag from ill timed bond purchases and losses on bonds, Bank of America earnings are better than expected.
• Among other earnings, earnings from Goldman Sachs Group Inc GS and Lockheed Martin Corp LMT are worse than expected; earnings from Johnson & Johnson JNJ are better than expected.
• 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 negative in Apple Inc AAPL, Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOG, Meta Platforms Inc META, Microsoft Corp MSFT, NVIDIA Corp, and Tesla Inc TSLA.

In the early trade, money flows are mixed in SPDR S&P 500 ETF Trust 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. To see the locked content, please click here to start a free trial.

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 like a yo-yo in 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, there is enthusiasm about a bitcoin ETF, and has brought in buying.

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.