Extreme Positioning In NVIDIA Takes A Hit, Fed Minutes Ahead

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

Nvidia Positioning

Please click here for an enlarged version of the chart of NVIDIA Corp NVDA.

Note the following:

• This article is about the big picture, not an individual stock. The chart of NVDA stock is being used to illustrate the point.
• Nvidia is at the center of the artificial intelligence revolution. It is the best performing stock in the S&P 500 this year.
• The chart shows a pullback yesterday.
• The chart shows the volume yesterday was high when the stock dropped. This is a negative.
• RSI on the chart shows that NVDA is no longer overbought after the pullback. RSI shows that the stock can go either way after earnings.
• The chart shows extreme positive positioning in NVDA prior to the drop. The best way to understand extreme positive positioning is to think of a boat where everyone is on the same side.  It does not cause any problems as long as the waters are calm. However, if a storm comes and everyone is on the same side, the boat sinks.  
• The chart shows that yesterday, extreme positive positioning took a hit, resulting in a large drop in the stock. The positioning took a hit, not because a storm came, but because investors started jumping off the boat in anticipation of a storm from the earnings that are ahead.
• The options market is predicting an 11% move in NVDA stock in either direction after earnings. Pause for a second and think about it – this is the gain or loss of $200B in market value.
• We previously shared with you:

Less informed investors do not understand that stocks do not move based on published consensus earnings and revenue estimates. Stocks move based on whisper numbers. Whisper numbers are the numbers that analysts share privately, only with their best clients. The whisper numbers for NVDA are at $5 for earnings and $22B for revenue.

• After hours yesterday, sentiment took a hit when momo crowd favorite cybersecurity stock Palo Alto Networks Inc PANW reported earnings. The stock has fallen 24.6% as of this writing in the premarket. PANW was priced for perfection, and so is NVDA.
• FOMC minutes will be released at 2pm ET. Normally, FOMC minutes are market moving. However, today market movements are likely to be governed by position squaring by institutional investors ahead of NVDA earnings.
• In The Arora Report analysis, what happens to NVDA will impact the entire stock market. 
• 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 positive in Amazon.com, Inc. AMZN.

In the early trade, money flows are neutral in Apple Inc AAPL.

In the early trade, money flows are negative in NVDA, Microsoft Corp MSFT, Alphabet Inc Class C GOOG, Meta Platforms Inc META, 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

The momo crowd is buying stocks in the early trade. Smart money is inactive in the early trade.

Gold

The momo crowd is buying gold in the early trade. Smart money is inactive 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

API crude inventories came at a build of 8.52M vs. consensus of a build of 2.6M.

The momo crowd is like a yoyo in oil in the early trade. Smart money is inactive 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 some selling in the early trade on nervousness about NVDA earnings.

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.

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 unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.