Extreme Positive Sentiment

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

Note the following:

  •  The chart shows that only five days ago the stock market touched the top band of zone 2 (support).
  • The chart shows that since touching zone 2, the stock market has staged a strong rally, driving it to a new high.
  • RSI on the chart shows the stock market is now overbought.  Overbought markets tend to be vulnerable.
  • The chart shows there is buying in the early trade.
  • The rally from the top band of zone 2 was triggered by the collapse of the $45B Situational Awareness fund that lost 67% in July.  Prudent investors should note that if it was not for the collapse of Situational Awareness, the stock market would likely have continued to go down instead of rallying.
  • Prudent investors should also note that the main reason for the rally is a short squeeze.  Also aiding the rally are hopium on Iran and good earnings.  As good as earnings are, prudent investors need to be careful about the flawed narrative that momo gurus are loudly pumping.  We previously wrote:

Prudent investors pay attention.  Momo gurus are touting 47% earnings growth this quarter so far this quarter based on reported earnings.  In our analysis, the headline is highly misleading.  The reason is the large gains from equity investments in Amazon (AMZN) and Alphabet (GOOG, GOOGL) earnings need to be excluded to get a true picture.  When these equity gains are excluded, the earnings growth this quarter is about 28% vs. 23% consensus.  Earnings growth is strong, but nowhere near the misleading number momo gurus are touting.  

  • In our analysis, the short squeeze is likely not done yet.  This means the short squeeze can provide more fuel for a rally.  
  • Iran hopium can also provide more fuel for the stock market rally.  However, investors need to be careful about Iran hopium.  On one side, there is President Trump trying to find a way out with a sharp eye on the midterm election that is quickly approaching.  On the other hand, there is Iran believing it has the upper hand.
  • Even though the U.S. is saying there is great progress in talks with Iran, Iran is saying that the U.S. is not part of the negotiations and negotiations are taking place between Iran and Oman.
  • Houthis have attacked a Saudi oil tanker in the Red Sea, but as of this writing, the stock market is ignoring it, putting weight on statements from the U.S. that a good deal with Iran is near.
  • In our analysis, investors should also be careful because stock market sentiment has quickly reached extreme positive.  If sentiment had not reached extreme positive so quickly, it would have been easier to start tactical positions from the long side.  Extreme positive sentiment is a contrary signal – in plain English this means sell.  However, it is important to remember that sentiment is not a precise timing indicator.  
  • Investors need to look ahead beyond today’s bullishness in the stock market. 
    • September and October tend to be seasonally weak.  
    • Most stock market crashes occur in September and October.
    • Midterm elections are ahead – historically the stock market goes through a weak period before the midterm election and then rallies after the election.
  • Adding to the cross currents is good news for NVIDIA Corp (NASDAQ:NVDA).  Elon Musk’s Space Exploration Technologies Corp (NASDAQ:SPCX) has exclusively chosen Nvidia’s Blackwell architecture.  SpaceX will also use Nvidia chips for space data centers.  SpaceX is targeting up to 10 GW of compute by 2027.  The loser here is Nvidia competitor Advanced Micro Devices Inc (NASDAQ:AMD).
  • In important earnings, earnings from Eli Lilly And Co (NYSE:LLY), Walt Disney Co (NYSE:DIS), Shopify Inc (NASDAQ:SHOP), and Arista Networks Inc (NYSE:ANET) are above consensus and whisper numbers.
  • ADP is the largest payroll processor in the country.  ADP uses its data to give an advanced glimpse of the jobs picture before the official jobs report on Friday.  ADP employment change came at 44K vs. 75K consensus.
  • In our analysis, at this time the stock market likes weak employment because if employment is weak, it will be difficult for the Fed to raise rates.  Prudent investors need to keep in mind that lately there has not been a good correlation between ADP data and the official U.S. data.  
  • ISM non-manufacturing index was released at 10am ET.

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), Nvidia (NVDA), Microsoft Corp (NASDAQ:MSFT), Alphabet Inc Class C (NASDAQ:GOOG), and Meta Platforms Inc (NASDAQ:META).

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

In the early trade, money flows are negative in Tesla Inc (NASDAQ:TSLA).

In the early trade, money flows are positive in S&P 500 ETF (SPY) and neutral 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 (NYSE:USO).

Oil

API crude inventories came at a build of 2.69M barrels vs. a consensus of a draw of 2M barrels.

Bitcoin

Bitcoin (CRYPTO:BTC) is range bound.

What To Do Now

Consider continuing to hold good, very long term, existing positions and add tactical positions based on signals.

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.