Surprise Resulted In This Market Mechanic Causing A Sell-Off Before Traditional Santa Claus Rally

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

Market Mechanics Surprise

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 sell-off yesterday.
• The chart shows the sell-off brought the stock market below the low band of the resistance zone.
• The chart shows that this morning the stock market is rallying again in the early trade and is back to the low band of the resistance zone.
• The chart shows that RSI was very overbought, and thus the stock market was vulnerable to a sell-off when a surprise occurred in market mechanics.
• As we have been sharing with you, several market mechanics have been driving the stock market up. One of those market mechanics is 0DTE options. Everyday traders have been aggressively buying 0DTE calls. Everyday when the market started going up, market makers were forced to buy stocks to hedge the calls they had sold.
• During the rally, market makers were more than happy to sell puts to investors as everyday puts expired worthless, resulting in market makers making huge profits. As the rally continued, market makers stopped hedging the puts they were selling. After all, there was no point in hedging because the stock market went up everyday.
• In yesterday’s Afternoon Capsule, we shared with you that the Treasury auction was weak.
• The weak Treasury auction caused the stock market to turn down. Market makers were caught flat footed as they had sold lots of puts without hedging. As the market went down, market makers were forced to sell stocks to hedge the puts they had sold.
• The result of the surprise encountered by market makers was they were forced to sell stocks to hedge, causing the biggest sell-off since September.
• The sell-off came just before the traditional Santa Claus rally.
• Traditionally, the Santa Claus rally starts tomorrow.
• The sell-off yesterday illustrates why it is so important for all investors to deeply understand market mechanics. Due to their very high value, Wall Street professionals keep the secrets of market mechanics close to the chest, making it difficult for most investors to understand market mechanics even when they try. To help you, we have made it easy for you to know, understand, and apply Wall Street’s best kept secrets. There are several podcasts in Arora Ambassador Club. You can join the exclusive Arora Ambassador Club by invitation only.  
• We have been receiving a large number of questions from our very smart members trying to figure out what caused Powell’s flip that resulted in a massive stock market rally.  Afterall, Powell and the Fed had the same data two weeks before the flip when they were very hawkish.  We had previously shared with you that on the surface the answer was in the dot plot. Our members are asking what was the real reason behind the switch in the dot plot. When you connect the data points, the real reason becomes clear. Please listen to the podcast titled “Protect Yourself: The Dirty Secret Of The President And The Fed” to understand the real reason behind Powell’s flip.
• 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.

Jobless Claims

Weekly Initial Claims came at 205K vs. 218K consensus. Weekly Initial Claims is a leading indicator and carries heavy weight in our adaptive ZYX Asset Allocation Model with inputs in ten categories. In plain English, adaptiveness means that the model changes itself with market conditions.  Please click here to see how this is achieved.  One of the reasons behind The Arora Report’s unrivaled performance in both bull and bear markets is the adaptiveness of the model.  Most models on Wall Street are static.  They work for a while and then stop working when market conditions change.

This indicates that the jobs picture is very strong. More importantly, this data does not support the consensus in the market of six rate cuts next year.

GDP

Q3 GDP-third estimate came at 4.9% vs. 5.2% consensus. This indicates that the economy is strong even though the data is somewhat weaker than the consensus. Keep in mind that this is a lagging indicator. The Arora Report system focuses on leading indicators.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Apple Inc AAPL, Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOG, Meta Platforms Inc META, Microsoft Corp MSFT, NVIDIA Corp NVDA, and Tesla Inc TSLA.

In the early trade, money flows are positive 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 aggressively buying stocks in the early trade. Smart money is 🔒 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 buying 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 seeing buying on the hopes that whales will take advantage of the low liquidity over the weekend and run up bitcoin.

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 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 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.

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