Two Different Market Mechanics Driving The Stock Market In Opposite Directions

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

Stock Market Mechanics

Please click here for a chart of SPDR S&P 500 ETF Trust SPY which represents the benchmark stock market index S&P 500.

Note the following:

• The chart shows that the stock market has pulled back to the top band of the top support/resistance zone.  This is a disappointment to the bulls as they were expecting a straight shot up.  
• RSI on the chart shows that the stock market has relieved its overbought condition due to the pullback and now can easily go either way.  
• There are two different Wall Street mechanics at play this week.  
  • Quarter end window dressing
  • Quarter end rebalancing
• These two stock market mechanics are pulling the market in opposite directions.
• In quarter end window dressing, money managers buy the best performing stocks to show their clients in their quarterly reports that they are holding the best performing stocks.  Such buying causes the best performing stocks to run up even more. 
• In quarter end rebalancing, this time money managers are selling stocks to buy bonds.  The impact is pushing down stocks, especially the best performing stocks.  
• Understanding Wall Street mechanics can give investors a big edge.  Learning Wall Street mechanics is not always easy because most of the information is kept confidential due to its high value.  Fortunately, there are podcasts in Arora Ambassador Club.  The podcasts are titled “Market Mechanics: Positioning” and “Market Mechanics: Understand Zero-Day Options To Gain An Edge.”
• Powell will be speaking on Wednesday at the European Central Bank forum.  Powell may move the markets. 
• As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

Strong Economic Data

Economic data continues to be strong.  

• Durable orders came at 1.7% vs. -1.0% consensus. 
• Durable goods ex-transportation came at 0.6% vs. 0.0% consensus.

Home Prices

Case-Shiller Home Price Index came at -1.7% vs. -2.5% consensus.

Europe

Christine Lagarde, President of the European Central Bank (ECB), is emphasizing that the war on inflation is not over.  Her comments at the ECB forum are hawkish. 

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.

Oil

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

For longer-term, please see oil ratings.

Bitcoin

Bitcoin BTC/USD is range bound.

Markets

Our very, very short-term early stock market indicator is neutral.  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 21% - 39% in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 3% - 6%, and short term hedges of 5% - 8%. 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.