Opportunities Ahead – Avoid Classic New Year Mistake, China And Iran Threats, Bitcoin Rumor

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

Opportunities Ahead But Be Astute

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:

• Plenty of opportunities are ahead in 2024, but you need to be astute as to when to buy, what to buy, and how to buy if you want market beating returns.  
• The chart shows that during the Santa Claus rally, the stock market did not hit the top band of the resistance zone. In the very short term, this is a negative.
• The chart shows the stock market has pulled back to the low band of the resistance zone. To maintain bullish posture, the stock market needs to not go much below the bottom band of the resistance zone.
• There are likely many stops right below the bottom band of the resistance zone.  If the stock market starts dropping, hunt and destroy algorithms will go into action and take out the stops. This is the reason that The Arora Report recommends not placing stops at obvious points.
• Historically, after the stops are taken out, there is a bounce. Officially, the period for the Santa Claus rally will end at the close tomorrow.
• RSI shown on the chart is on a sell signal, but the pattern is such that it can quickly reverse to a buy signal.
• RSI on the chart shows negative divergence. In plain English, this means that RSI and the price are moving differently. This is a negative in the very short term.
• In the early trade this morning, there is considerable tax related selling. Historically, such selling is common after a strong year. The reason is that investors did not want to sell in 2023 to avoid paying capital gains taxes for the 2023 tax year.  By selling now, they have successfully postponed paying capital gains tax by one year.
• As the year starts, investors are again making the classic mistake that we warned you about late last year. The classic mistake investors make at this time of the year is to act on the following:
  • 2024 year end targets from Wall Street strategists
  • Sector recommendations from Wall Street strategists
• In our 40 years in the markets, a vast majority of the time, Wall Street strategists are wrong. To understand the recent history, consider the following:
  • Right now, investors are worshiping permabulls and deriding permabears.
  • In 2023 at the start of the new year, investors were worshiping permabears and deriding permabulls. What did the stock market do? The stock market went up.
  • In 2022 at the start of the new year, investors were worshiping permabulls and deriding permabears. What did the stock market do? The stock market went down.
• In The Arora Report analysis, as important as it is to make good investments and trades, it is equally important to not make mistakes. To help you, there is a podcast titled “The Classic Mistake Of The New Year Projections Trap” in the exclusive Arora Ambassador Club.  Thank you for all of the positive feedback on the podcast.  
• As you start the new year, The Arora Report recommends that you neither be a permabull or a permabear.  Instead, start with Arora’s Second Law of Investing And Trading: “Nobody knows with certainty what is going to happen next in the markets.”  Consider flowing with the new data as it comes.
• It is important to understand the reason behind the investors’ behavior that leads to lower returns. Investors suffer from recency bias – they expect the road ahead to be exactly the same as the road behind over the recent past.
• There are significant geopolitical developments on two fronts. Please see the sections below on China and Iran.
• 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.
• There is no change in the protection band as of this writing, but expect changes as more data comes in.
• You do not want to buy at the top. There are plenty of opportunities ahead in 2024.  Consider being patient.

Take Profits On Tactical Positions

This is a continuation of the call just before the close of 2023. Consider continuing to take partial profits on tactical positions by scaling out. Consider continuing to hold very long term strategic positions.  New members, consider reading the “Strategic Vs. Tactical,” “Strategy,” and “Tactics” sections of a prior Afternoon Capsule.

China Threatens To Invade

Elections in Taiwan are ahead. China is threatening to invade if Taiwanese people vote for the pro-independence candidate. If China decides to invade Taiwan and President Biden decides to defend Taiwan, there is a prospect of World War III.  In The Arora Report analysis, the probability of an invasion is low.  Nonetheless, you should not underestimate this risk.

Iran Sends Warship To Red Sea

The Red Sea is important because 12% of the world’s commerce moves through the Red Sea. The U.S. sank three Houthi boats over the weekend. The U.S. action came after Houthis attempted to sink a large commercial vessel that the U.S. had vowed to protect. Houthis are based in Yemen and are backed by Iran.

In The Arora Report analysis, the probability is high that Iran will back off as Iran understands that it is no match for the U.S. naval power.  Having said that, prudent investors should keep an eye on the situation.  Oil is running up.  

Magnificent Seven Money Flows

In the early trade, money flows are positive in Tesla Inc TSLA.

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, and NVIDIA Corp NVDA.

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

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 buying oil in the early trade. Smart money is 🔒 oil in the early trade.

For longer-term, please see oil ratings.

The most popular ETF for oil is United States Oil ETF USO.

Bitcoin

There is a rumor that a Bitcoin BTC/USD ETF will be approved as soon as tomorrow.  The rumor has driven bitcoin above the key level of $45,000. The SEC has until January 10 to make a decision on bitcoin ETFs.

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.