Prudent Investors Pay Attention To Canary In Coal Mine – Oblivious Momo Crowd Supporting The Market

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

Canary In The Coal Mine

Please click here for an enlarged chart of SPDR S&P 500 ETF Trust SPY which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

• The chart shows that the stock market continues to move higher.
• On SPY, $550 is the magnet for short term traders.
• The chart shows that the market is now significantly above the support zone. This illustrates that in the middle of the AI buying frenzy, if the momentum turns down, the momo crowd that is buying aggressively now can quickly incur substantial losses.
• The chart shows that the volume continues to be low, indicating a lack of conviction in the momentum driven rally concentrated in AI stocks.
• RSI on the chart shows that the stock market is very overbought. Overbought markets tend to be vulnerable to pullbacks.
• The market can continue to go higher on momentum, but for the longer term, this momentum will be sustainable only if the following occurs:
  • The Fed aggressively starts cutting rates.
  • AI driven productivity rises faster than The Arora Report currently projects.
• The Arora Report has been sharing with you for a while that the consumer, especially at the low end, has spent most of the liquidity they gained from free money and other government programs.  We have also been sharing with you that the call on the low end consumer should start showing up in the data. The just released retail sales data shows that The Arora Report calls have been spot on.
• Prudent investors pay attention to retail sales. The reason is that the U.S. economy is 70% consumer based. Retail sales are a good indication of how the consumer is doing. Here are details of the just released data:
  • Headline retail sales came at 0.1% vs. 0.3% consensus.
  • Retail sales ex-auto came at -0.1% vs. 0.2% consensus.
• The momo crowd is oblivious and continues to aggressively buy AI stocks.
• If it was not for the obliviousness of the momo crowd, the stock market would have dropped significantly on the weak retail sales data. The reason is that the momo crowd is taking for granted that there will be no landing. Even smart analysts are lock, stock, and barrel investing based on a soft landing.  Retail sales are like a canary in a coal mine.
• In noteworthy news, Fisker Inc FSRN, once an EV favorite of the mom crowd,  has filed bankruptcy. The lesson for investors is that it is fine to do short term trades based on momentum, but good investments require 360 degree analysis.
• 20-year Treasury auction results will be announced at 1pm ET and may move the market.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Apple Inc AAPL, Microsoft Corp MSFT, NVIDIA Corp NVDA, and Tesla Inc TSLA.

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

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

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

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.

Note for new investors: 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.

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 GLD. The most popular ETF for silver is iShares Silver Trust SLV. 

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.

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 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.