Quad Witching Driving AI Stocks Including Nvidia Higher, More One Month Lows Than Highs In NASDAQ

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

Deteriorating Internals

Please click here for an enlarged chart of Invesco QQQ Trust Series 1 QQQ.

Note the following:

  • The chart shows that Nasdaq 100 is way overextended above the support zone.
  • Overextended markets work only as long as momentum stays high. If momentum stops, the market tends to pullback.
  • The chart shows that the volume is low as the market drives higher. This indicates lack of conviction.
  • RSI on the chart shows Nasdaq 100 is very overbought. Risk and reward are two sides of the same coin. A market as overbought as this one is risky.
  • In The Arora Report analysis, prudent investors should pay attention to deteriorating internals of Nasdaq 100. There are more one month lows than one month highs in the Nasdaq 100 stocks.  
  • The stock market, including AI stocks such as NVIDIA Corp NVDA, Hewlett Packard Enterprise Co HPE, Dell Technologies Inc DELL, Super Micro Computer Inc SMCI, and Taiwan Semiconductor Mfg. Co. Ltd. TSM, are being pulled higher by quadruple witching. Tomorrow is quadruple witching. In quadruple witching, stock index futures, futures options, stock options, and single stock futures expire.  Quadruple witching often leads to volatility.
  • There are many factors driving NVDA stock higher. An important factor driving NVDA higher is the market mechanic of gamma squeeze.
  • There are two pieces of news that are noteworthy for investors.
    • Hackers claim that they have breached Apple Inc AAPL source code. If true, it would sully Apple’s image of invisibility.
    • Elon Musk says that Dell is assembling half of the racks for the super computer being built by xAI.
  • Initial jobless claims came at 238K vs. 237K consensus. We have previously emphasized the importance of looking at the four week moving average. The four week moving average is rising, indicating that the jobs picture is beginning to weaken. 

Housing

Housing data is weaker than expected. Here are the details:

  • Housing starts came at 1.277M vs. 1.385M consensus.
  • Building permits came at 1.386M vs. 1.455M consensus.

England

The Bank of England (BoE) has decided to hold rates steady. The vote was seven to two. BoE is showing a dovish tilt.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Meta Platforms Inc META and NVDA.

In the early trade, money flows are neutral in Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOG, Microsoft Corp MSFT, and Tesla Inc TSLA.

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

In the early trade, money flows are positive in SPDR S&P 500 ETF Trust SPY and Nasdaq 100 ETF (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 buying 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. The post holiday buying is being met with selling in bitcoin.

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.

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