Dip Buyers Save The Stock Market; Hindenburg Omen Appears

Dip Buyers Save The Market

Please click here for an enlarged chart of Invesco QQQ Trust Series 1 (NASDAQ:QQQ).

Note the following:

• The chart shows QQQ was weakening going into Friday morning.
• The chart shows mindless dip buying saved the stock market.
• The chart shows that the morning today started with buying in QQQ, but as the morning has progressed, sellers have become dominant.
• The VUD indicator is the most sensitive measure of net supply and demand in real-time. The orange represents net supply and the green represents net demand.  The VUD indicator is mixed in the early market today.
• The stock market was weakening for three reasons:
  • Four Fed presidents had come out against a December rate cut, defying intense political pressure to cut rates.  When four Fed presidents came out against a rate cut, investors had to pay attention to the data.  The data does not support a rate cut.  In our analysis, based on the existing data so far, a rate cut in December will be a wrong thing for the Fed to do.  However, if the Fed does the wrong thing, it will drive stocks, bitcoin, and gold higher in the short term.  The stock market was counting on the Fed doing the wrong thing.
  • Concerns have been mounting around large debt financing of AI data centers.  A bond offering from data center company Applied Digital Corp (NASDAQ:APLD) became a poster child of the troubles when APLD was forced to pay 10% interest.  This is a very important subject for prudent investors.
  • Market internals have been weakening.
• Did anything change in any of the three foregoing reasons that brought in very aggressive buying?  The answer is nothing has changed.  All three concerns are still there.  The buying came from mindless dip buyers.  The limited extent of the analysis of mindless dip buyers results in aggressively buying stocks on any dip.
• Among technically oriented investors, concern has arisen from the Hindenburg omen.  This is a warning signal that has fired five times recently.  Here are the two important points for the Hindenburg omen that prudent investors need to know:
  • The Hindenburg omen has given a signal at every major top over the last 25 years.
  • The Hindenburg omen has also given a large number of false warning signals.
• Another concern is that many technically oriented investors believe small caps, represented by iShares Russell 2000 ETF (NYSE:IWM), are showing a head and shoulders pattern.  This is a bearish pattern.  Prudent investors should note that the pattern is not well formed, and, as such, is suspect.
• On the positive side, Warren Buffett's Berkshire Hathaway Inc Class B (NYSE:BRK) bought $4.9B worth of Alphabet Inc Class A (NASDAQ:GOOGL) stock.
• Now that the government is open, a deluge of economic data is ahead.
• Several important earnings are ahead, including Home Depot Inc (NYSE:HD), Lowe’s Companies Inc (NYSE:LOW), Target Corp (NYSE:TGT), NVIDIA Corp (NASDAQ:NVDA), and Walmart Inc (NYSE:WMT).

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks.  For this reason, it is important to pay attention to early money flows in the Mag 7 stocks on a daily basis.

In the early trade, money flows are positive in Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc Class C (NASDAQ:GOOG).

In the early trade, money flows are negative in Apple Inc (NASDAQ:AAPL), Meta Platforms Inc (NASDAQ:META), Nvidia (NVDA), Microsoft Corp (NASDAQ:MSFT), and Tesla Inc (NASDAQ:TSLA).

In the early trade, money flows are negative in SPDR S&P 500 ETF Trust (NYSE:SPY) and Nasdaq 100 ETF (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 (CRYPTO: BTC) promoters have been out in full force urging their followers to buy the dip in bitcoin.  Retail investors continue to buy bitcoin aggressively.  Prudent investors should note that every rally attempt over the weekend and this morning failed, in spite of low liquidity.  This is different from the recent pattern where low liquidity allowed bitcoin promoters to push bitcoin higher.

What To Do Now

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.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.