INVESTORS CHANGE BEHAVIOR TO HEDGING INSTEAD OF SELLING, 80% OF EARNINGS BETTER THAN EXPECTED

By?Nigam Arora?& Dr. Natasha Arora

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

Hedging Instead Of Selling

Please click here for a chart of S&P 500 VIX Short-Term Futures ETN (VXX) and S&P 500 ETF (SPY) which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

• ?In September and October, institutional investors engaged in abnormal behavior.
• -- Normally, there is selling during the seasonally weak period of September and October.
• -- This year, due to the Fed spiking the punch with a 50 bps cut when the data did not support it, investors have taken to hedging instead of selling during the traditionally weak seasonal period.
• VXX is a popular ETN used for hedging.? Previously for a short period, VXX had become unsuitable for hedging.? During that period, we recommended VIXY as an alternative.? Now, VXX is suitable for hedging, but investors must be judicious.
• Normally, VXX moves inverse to SPY.? When SPY rises, VXX falls.
• The chart shows a drop in SPY in August and the accompanying spike up in VXX.
• The chart shows that as SPY rose after the carry trade unwind VXX fell but still sustained at a higher level compared to the low level in July.
• The chart shows when the Fed cut interest rates by 50 bps.? We have been sharing with you that the data since the Fed cut shows that the 50 bps was not justified and resulted in the Fed spiking the punch bowl.
• Spiking the punch bowl shows up on the chart as a rise in SPY since the interest rate cut.
• The chart shows that as SPY has risen VXX has not fallen.
• The chart shows that VXX was trading at $51.75 at the time of this writing.? If the normal pattern held, based on the rise in S&P 500, VXX should have fallen to about $35.
• Why is VXX staying elevated, trading about 50% higher than it should have?? The reason is high demand for VXX for hedging.? The chart demonstrates that investors have been hedging instead of the traditional pattern of selling during September and October.? For those interested in learning more about hedging, please click here.
• The prevailing wisdom among institutional investors is that since the stock market traditionally goes up after the election and this time the punch bowl has been spiked by the Fed, it is better to hedge than to sell.?
• Yields on long bonds continue to rise.? The yield on 10 year Treasuries has now hit 4.136% as of this writing.? At the time of the Fed rate cut, most experts were predicting the yield to fall into the range of 3% – 3.25%.? You may recall that at the time of the Fed rate cut, The Arora Report made a contrary call that yields on long bonds would rise.? That call continues to prove spot on just like almost all calls from The Arora Report related to the Fed over the last 17 years.
• In theory, rising yields should have dragged the stock market down, but that has not happened because investors are hedging instead of selling.??
• We have previously written that for the stock market to sustain at this level and advance from here, earnings will need to be very robust.? In this regard, The Arora Report analysis shows that the data is bullish.? So far, 80% of the earnings that have been released are better than expected.??
• This week is a very earnings heavy week.? 7 DJIA stocks and 112 S&P 500 stocks are reporting earnings this week.? Earnings this week will have to be robust for the stock market to continue its advance.
• As the stock market rises, insiders are taking advantage of the strength and selling stocks.
• Adding to the positive sentiment is aggressive buying in nuclear stocks.? In the premarket, buying in nuclear stocks is extremely aggressive.? For those wanting next level information, part two of the podcast series titled “AI Is Power Hungry – Opportunities In Nuclear” will be live shortly.? The podcast is available in Arora Ambassador Club.? Please click here to fill out the form to get on the waitlist.
• In news of note, Boeing (BA) and the machinists union have reached a tentative agreement.? Boeing is a national gem and contributes heavily to U.S. exports.
• Stock futures were weak in the early morning, but as the morning has progressed, stocks are seeing aggressive buying.
• 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. The protection band is one of the large number of unique edges that are available to members of The Arora Report.

See also? POWELL STOCK MARKET DIP AGGRESSIVELY BOUGHT, IMPORTANT DATA AND BLIND MONEY AHEAD

Europe

In Europe, there is some selling as PPI in Germany came below expectations.? PPI came at -0.5% vs. -0.2% consensus.

In The Arora Report analysis, if the European Central Bank (ECB) decides to make its decision based on data, the ECB is less likely to be as aggressive in rate cuts as the stock market is expecting.?

China

In China, banks cut their one year and five year prime rates by 25 bps. ?In The Arora Report analysis, expectations were for 20 bps cuts.??

Magnificent Seven Money Flows

In the early trade, money flows are positive in Apple (AAPL).

In the early trade, money flows are neutral in Alphabet (GOOG), Meta (META), Amazon (AMZN), and Nvidia (NVDA).

In the early trade, money flows are negative in Microsoft (MSFT) and Tesla (TSLA).

In the early trade, money flows are mixed in S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ).

Momo Crowd And Smart Money In Stocks

The momo crowd is *** (To see the locked content, please take a 30 day free trial) stocks in the early trade.? Smart money is *** in the early trade.

Note for new members: Smart money often sells into the strength generated by momo crowd buying and buys into the weakness generated by momo crowd selling.? Over a long period of time, investors come out ahead by adopting smart money’s ways.? The exception is in a raging bull market – for very short term trades, consider following the momo crowd and not smart money.

Very Very Short-Term Indicator

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.

See also? WEEKLY STOCK MARKET DIGEST: PRUDENT INVESTORS PAY CLOSE ATTENTION TO GLOBAL EVENTS AND THEIR IMPACT ON THE STOCK MARKET

Gold

Silver has broken out. ?There is a new trade around position in ZYX Buy.

The momo crowd is *** gold in the early trade.? Smart money is *** in the early trade.

For longer-term, please see gold and silver ratings.

Oil

The momo crowd is *** oil in the early trade.? Smart money is *** in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin (BTC.USD) approached $70,000 before pulling back on enthusiasm about a possible Trump win.

Markets

Interest rates are ticking up, and bonds are ticking down.

The dollar is stronger.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

S&P 500 futures are trading at 5895 as of this writing.? S&P 500 futures resistance levels are 5926 and 6017: support levels are 5748, 5622, and 5500.

DJIA futures are down 34 points.

Gold futures are at $2752, silver futures are at $34.435, and oil futures are at $69.84.

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.

See also? CHINA BAZOOKA BRINGS OPTIMISM TO U.S. STOCKS, MICRON EARNINGS SHOW THE VALUE OF KNOWING POSITIONING

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.

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