Failed Nvidia Breakout Burns Momo Crowd, Interest Rates Rise On Strong Economic Data

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

Interest Rates Rise

An enlarged 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.
• The chart shows NVDA stock attempted to break out yesterday after a great speech from Nvidia CEO Jensen Huang.
• The chart shows NVDA stock fell below the micro resistance zone and is in the support zone as of this writing in the premarket.  Previously, the micro resistance zone was a micro support zone.
• The chart shows the breakout of NVDA stock failed.
• The chart shows the pullback yesterday was not on low volume.  This indicates conviction.
• The pattern on the NVDA chart is known as an outside day.  This is a negative pattern.
• The momo crowd was piling into NVDA stock going into Huang's speech and in the early trade yesterday.  The momo crowd aggressively bought out of money call options that are likely to expire worthless.
• The momo crowd is suffering major losses because they took on a very large quantity of call options and fully margined large stock positions.  This underscores the importance of position sizing.  The Arora Report is one of very few resources that has perfected the art of position sizing.
• The real reason behind NVDA's breakout falling is that the stock is in the fifth stage of the five stages of a long trade.  When a stock is in the fifth stage, there are three possible futures:
  • The stock stays in stage five for a long time.
  • The stock starts the five stages of a short trade.
  • The stock breaks out and starts another cycle of the five stages to the upside.
• As full disclosure, The Arora Report's call is to partially hedge NVDA and other semiconductor stocks, including semiconductor ETF VanEck Semiconductor ETF SMH.
• Bond yields have been rising in response to strong economic data:
  • ADP employment change came at 122K vs. 131K consensus.
  • Initial jobless claims came at 201K vs. 218K consensus.
  • JOLTS job openings came at 8.098M vs. 7.839M prior.
  • ISM Services came at 54.1% vs. 53% consensus.
• Rising yields are beginning to put pressure on stocks.

Magnificent Seven Money Flows

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

In the early trade, money flows are neutral in Meta Platforms Inc .

In the early trade, money flows are negative in Apple Inc, Amazon.com, Inc., Alphabet Inc Class C , and Tesla Inc.

In the early trade, money flows are mixed in SPDR S&P 500 ETF Trust and Invesco QQQ Trust Series 1.

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.  The most popular ETF for silver is iShares Silver Trust.  The most popular ETF for oil is United States Oil ETF.

Bitcoin

Bitcoin has seen selling along with other speculative and junk stocks.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.  The proprietary protection band from The Arora Report is very popular.  The protection band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.

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.

The Arora Report is known for its accurate calls. The Arora Report correctly called the big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, the DJIA rally to 30,000 when it was trading at 16,000, the start of a mega bull market in 2009, and the financial crash of 2008. Please click here to sign up for a free forever Generate Wealth Newsletter.