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Quantum Breakthrough

Please click here for an enlarged chart of Lithium Americas Corp (NYSE: LAC).

Note the following:

• This article is about the big picture, not an individual stock.  The chart of LAC stock is being used to illustrate the point.
• The chart shows extremely aggressive momo crowd buying in LAC stock.
• The buying shown on the chart is in part driven by a short squeeze.  The trigger for the buying is the U.S. government's intention to seek up to a 10% stake in Lithium Americas.  Lithium Americas is a Canadian lithium miner and a majority owner of Thacker Pass mine in Nevada.  General Motors Co (NYSE: GM) owns a minority stake in the mine.
• Under the Biden administration the Department of Energy had agreed to give Lithium Americas a $2.2B loan.  It is likely that Lithium Americas will not get any new money but will end up diluting its existing shareholders as the government gets equity as a gift.  The momo crowd is oblivious to President Trump's statement that nothing is free.  In reality, this is a negative development for LAC shareholders.  The momo crowd is buying LAC stock as pumpers promote a highly flawed comparison to Mp Materials Corp (NYSE: MP).  MP Materials is a rare earth mineral miner.  MP stock ran up when the Department of Defense took 15% equity.  The big difference is in the case of MP Materials, the Department of Defense is also buying rare earth minerals from MP Materials at above market prices.  In the case of Lithium Americas, the government does not plan on buying any lithium from the company.   Further, the supply of lithium in the world is significantly higher than current demand.  In contrast, China has a stranglehold on rare earth minerals and has used this to gain a formidable advantage in trade talks with the U.S.
• From a big picture point of view, the move up in LAC is a sign of extremely positive sentiment and high liquidity.  The insanity being seen right now in the momo crowd's buying of LAC stock is typically seen in periods of extreme positive sentiment.
• As we have shared with you before, extreme sentiment is a contrary indicator.  In plain English, this means sell.  However, several nuances are worth a reminder:
  • Sentiment is not a precise timing indicator.
  • Sentiment can stay in the extreme positive zone for a long time.
  • When sentiment is in the extreme positive zone, it does not mean to sell wholesale.  It means the following:
    • Be highly cautious in starting new strategic positions.
    • Most new positions should be tactical.
    • It is important to have strict risk controls such as appropriate position sizes and stop losses.
    • There is merit to trimming or taking partial profits.
  • As an actionable item, when sentiment is in the extreme positive zone, most investors should consider being in the upper half of the Arora Protection Band.
• We have been sharing with you extremely aggressive momo crowd buying in nuclear smart modular reactor stock Oklo Inc (NYSE: OKLO) as a result of extremely positive overall sentiment in the market.  Such spikes are common when the sentiment is extremely positive.  You may be asking what insiders are doing – insiders are selling, taking advantage of momo crowd buying.  Smart money is also selling OKLO stock.  It is also common behavior as smart money takes advantage of the momo crowd.  As of this writing, OKLO stock has fallen from a high of $144.45 yesterday to $110.83 as of this writing in the premarket.  Unless the stock rebounds, the momo crowd will be left holding the bag as is often the case when it is all said and done.
• Prudent investors should note that just like OKLO, there is significant insider selling in most stocks that the momo crowd is running up.
• We have been sharing with you that there have been many pull forwards in different ways in this stock market.  This morning,  used car dealer Carmax Inc (NYSE: KMX) is illustrating the dangers when investors do not understand pull forward.  As of this writing, KMX stock is falling about 18% as the company admits that previously its sales were pulled forward as consumers bought ahead of tariffs.
• There is more excitement about Intel Corp (NASDAQ: INTC) as the company seeks investment from Apple Inc (NASDAQ: AAPL).
• HSBC Holdings PLC (NYSE: HSBC) is Europe’s largest lender.  In a first, HSBC is reporting a quantum breakthrough in bond trading using quantum computing.   In a test using quantum computing, the bank saw a 34% increase in correctly predicting the probability of a trade fill at the quoted price compared with present day techniques.  HSBC used a quantum computer from IBM Common Stock (NYSE: IBM).  IBM stock is jumping.  Other quantum computing stocks such as IONQ Inc (NYSE: IONQ), Rigetti Computing Inc (NASDAQ: RGTI), Quantum Computing Inc (NASDAQ: QUBT), D-Wave Quantum Inc (NYSE: QBTS) continue to levitate but are not significantly rallying as of this writing because they are very overbought and smart money is selling, taking advantage of the spikes caused by extremely aggressive momo crowd buying.
• Just released GDP data shows the economy is strong.  Here are the details:
  • Q2 GDP Third Estimate came at 3.8% vs. 3.3% consensus.
  • GDP Deflator Third Estimate came at 2.1% vs. 2.0% consensus.
• Durable orders data is also strong.
  • Durable orders came in at 2.9% vs -0.5% consensus.
  • Durable orders ex-transportation came at 0.4% vs -0.1% consensus.
• Initial jobless claims came at 218K vs. 238K consensus. This data is also very strong.
• The strong economic data is upsetting momo gurus' narrative they use to persuade the momo crowd to aggressively buy stocks.  Momo gurus' narrative has been that the economy is weak and that will persuade the Fed to aggressively cut interest rates.  The fact that momo gurus are wrong again is nothing new.  It is not a problem for momo gurus as they are good at being chameleons.  Expect momo gurus to come up with a new narrative to persuade the momo crowd to buy stocks.
• The Fed's favorite inflation gauge, PCE, will be released tomorrow at 8:30am ET.

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks.  For this reason, to get ahead and get an edge, investors need to dig below the surface of the Mag 7 stocks.  It is equally important to rise above the noise of daily news on the Mag 7 stocks.  The best way to get an edge, dig below the surface, and rise above the noise of the daily news is to pay attention to early money flows in the Mag 7 stocks on a daily basis.  When there is significant news in the Mag 7 stocks that rises above the threshold of noise and impacts your entire portfolio, it is covered in the main section above.

In the early trade, money flows are neutral in Apple (AAPL) and Amazon.com, Inc. (NASDAQ: AMZN).

In the early trade, money flows are negative in Alphabet Inc Class C (NASDAQ: GOOG), Meta Platforms Inc (NASDAQ: META), Microsoft Corp (NASDAQ: MSFT), NVIDIA Corp (NASDAQ: NVDA), and Tesla Inc (NASDAQ: TSLA).

In the early trade, money flows are negative in SPDR S&P 500 ETF Trust (NYSE: SPY) and Invesco QQQ Trust Series 1 (NASDAQ: 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) is seeing selling

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.

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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.

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