Oversold Condition And China Loophole Overpower Microsoft Miss And Japan Rate Hike

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

Bounce From Oversold

Please click here for an enlarged chart of Microsoft Corp MSFT.

Note the following:

• This article is about the big picture, not an individual stock. The chart of MSFT stock is being used to illustrate the point.
• The chart shows the drop in Microsoft stock after reporting earnings. The drop was due to Azure growth coming less than expected. Azure grew by 29% vs. 30% consensus and 31% whisper numbers. On the surface 1% – 2% may not seem important until attention is paid to Microsoft's valuation which is priced for perfection.
• The chart shows at 6pm yesterday, Nasdaq futures jumped, carrying MSFT and other stocks higher with them.
• We previously shared with you that tech stocks were oversold. Since 6pm yesterday, Nasdaq futures are on a tremendous run.
• In The Arora Report analysis, the strong bounce in Nasdaq futures is simply the result of oversold conditions and China loophole report.
• There is a China loophole report stating that the Biden administration is about the exempt the Netherlands, South Korea, and Japan from new export restrictions to China.
  • In The Arora Report analysis, such a move will be a serious error in judgment.  The reason is that the advanced equipment China needs to leapfrog the U.S. in semiconductors is made by ASML Holding NV (NASDAQ: ASML) in the Netherlands and Tokyo Electron in Japan.     
  • In The Arora Report analysis, there is a fair probability that the report is not truly as it seems and may simply be a manipulation by large funds who bought semiconductors near the highs and are now sitting on large losses to run up semiconductors so they can exit with smaller losses. 
• The Bank of Japan finally hiked its interest rate. Yen is stronger. As full disclosure, there is a position in yen ETF FYX in the ZYX Allocation Model Portfolio from The Arora Report.  
• For the time being, the power of the technical rally from oversold conditions and China loophole is overpowering the negative from Microsoft earnings and Bank of Japan's rate hike.
• Also helping the market are two pieces of data:
  • Employment Cost Index came at 0.9% vs. 1.0% consensus.
  • ADP Employment Change came at 122K vs. 160K consensus.
  • The market is looking at the foregoing weaker data as a positive for the Fed to cut interest rates.
• FOMC will make its policy announcement at 2pm ET followed by Powell's press conference at 2:30pm ET.
  • The consensus is that the Fed will leave rates unchanged but give indication of a rate cut in September.
• The options market is pricing in a 2+% move in the market after the Fed announcement.
• In The Arora Report analysis, the risk of the move is to both sides, even though on the surface it appears that the move should be to the upside. The reason for a potential downside move is that the market has been expecting the Fed to indicate a rate cut ever since November 2023 when Powell prematurely said rate cuts were coming.  Now, there may be a ‘sell the news' reaction.    
• Among notable earnings, T-Mobile Us Inc TMUS, DuPont de Nemours Inc DD, and Advanced Micro Devices, Inc. AMD reported strong earnings. As full disclosure, TMUS is in the ZYX Buy Core Model Portfolio from The Arora Report.  DD is in the portfolio that surrounds the Core Model Portfolio.  As full disclosure, a signal has just been given in ZYX Buy on AMD.
• Boeing Co BA has a new CEO. It is an important development due to the importance of BA to the U.S. economy.  As full disclosure, BA is in the ZYX Buy Core Model Portfolio from The Arora Report.

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, NVIDIA Corp NVDA, and Tesla Inc TSLA.

In the early trade, money flows are negative in MSFT.

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

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

Bitcoin

Bitcoin BTC/USD is range bound.

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.

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.