Benzinga - by The Arora Report, Benzinga Contributor.
To gain an edge, this is what you need to know today.
The Power Of Market Mechanics Please click here for an enlarged chart of Meta Platforms Inc (NASDAQ: META).
Note the following:
- This article is about the big picture, not an individual stock. The chart of META stock is being used to illustrate the point.
- The chart shows a gap down in META on earnings.
- The chart shows an island reversal. An island reversal is a negative pattern.
- RSI on the chart shows that META is now oversold.
- As full disclosure, META is part of The Arora Report's ZYX Buy Model Portfolio, and long-time members are long META from $49.92. Reference the chart for when the Arora signal was given to hedge or take partial profits right close to the top before the big drop in the stock.
- Meta reported excellent earnings, better than the consensus and whisper numbers. Why is META stock down? The popular narrative is that the stock is down due to AI spending and Mark Zuckerberg’s comment that AI spending will not produce immediate profits. With the exception of momo gurus who do not do objective analysis, non-momo analysts know that AI spending is not going to produce immediate profits.
- Yesterday, we highlighted that Tesla Inc (NASDAQ: TSLA) reported terrible numbers, but the stock jumped up on heavy AI spending on the prospect of future returns from AI spending. Please see yesterday’s Morning Capsule for details. For your convenience, click here for an enlarged chart of Tesla that was included in yesterday’s Morning Capsule. For the sake of full transparency, this chart has not been changed.
- Here is an important learning moment for investors. Why did TSLA stock jump 12% on bad numbers and heavy AI spending? Why did META stock fall 15% on excellent numbers and heavy AI spending? The real answer is Wall Street’s positioning.
- Going into TSLA earnings, Wall Street’s positioning was very negative.
- Going into META earnings, Wall Street’s positioning was extremely positive.
- Positioning often causes contrary moves. If you can fully grasp this one point of Wall Street mechanics, it will make a huge difference in the amount of money you extract out of the markets. Due to their high value, Wall Street professionals keep the secrets of Wall Street mechanics close to their chest.
- Here are three notable earnings impacting the sentiment in the stock market:
- IBM Common Stock (NYSE: IBM) stock had been running up on AI excitement. IBM reported earnings less than the whisper numbers. IBM stock has fallen about 10%. As a full disclosure, The Arora Report's ZYX Short took a short position in IBM and had a nice profit in a matter of minutes. Partial profits have already been taken.
- Construction machinery maker Caterpillar Inc. (NYSE: CAT) reported earnings worse than whisper numbers.
- Pharmaceutical company Merck & Co Inc (NYSE: MRK) reported earnings better than whisper numbers.
- Today, there will be an auction of $44B of seven year Treasuries. We will be carefully watching the results.
- In contrast to the prior two year auction, yesterday’s record auction of $70B of five year Treasuries was poor but not a canary in the coal mine. Here are the details:
- High yield: 4.659% (When-Issued: 4.655%)
- Bid-to-cover: 2.39
- Indirect bid: 65.7%
- Direct bid: 19.2%
- Initial jobless claims came at 207K vs. 217K consensus.
- In The Arora Report analysis, the just released Q1 GDP indicates stagflation may be coming. Here are the details:
- GDP-Adv came at 1.6% vs. 2.4% consensus.
- Price index came at 3.1% vs. 3.0% consensus.
- Core price index came at 3.7% vs. 3.4% consensus.
In the early trade, money flows are negative in SPDR S&P 500 ETF Trust (ARCA:SPY) and Invesco QQQ Trust Series 1 (NASDAQ: QQQ).
Momo Crowd And Smart Money In Stocks The momo crowd is buying stocks in the early trade. Smart money is selling stocks in the early trade.
Gold The momo crowd is like a yoyo in 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 (ARCA:GLD). The most popular ETF for silver is iShares Silver Trust (ARCA:SLV).
Oil 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 (ARCA:USO).
Bitcoin Bitcoin (CRYPTO: BTC) is seeing selling.
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 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.
This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.
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