The stock market is complex, but there is one aspect that is simple and provides real objective insights to investors.
The simplicity lies in comparing real buying demand to real selling supply in real time. When supply is significantly greater than demand, it is an indication of the market ready to go down, and vice versa. Let’s us explore with a chart.
Please click here for an annotated chart of the Nasdaq 100 futures NQZ7, -0.11% which represents Nasdaq 100 Index NDX, -0.05% Somewhat similar conclusions can be reached from charts of popular, broad-based ETFs such as the S&P 500 ETF SPY, -0.03% Nasdaq 100 ETF QQQ, -0.01% small-cap ETF IWM, -0.07% and DJIA ETF DIA, -0.12% which represents the Dow Jones Industrial Average DJIA, -0.17%
The advantage of using futures is that they provide significant data for pre-market and after-market. Also, Nasdaq 100 futures are used by speculators as a proxy for a group of popular tech stocks such as Nvidia NVDA, +5.27% Apple AAPL, -0.33% Google GOOG, -0.31% GOOGL, -0.34% Amazon AMZN, -0.33% Netflix NFLX, -0.97% Facebook FB, -0.47% and Tesla TSLA, +0.00%
The most notable feature of the chart is the VUD indicator. The VUD indicator compares real demand and real supply in real time. Please note the following from the chart.
• There was significant real net selling in the pre-market. The reason for this is described later in this article.
• During regular trading hours, when the market dipped on concerns about the Senate tax bill, net selling was minimal.
• During regular trading hours, there was neither excessive real buying nor excessive real selling.
• After the market close, there was again net real selling.
The conclusion from the foregoing is that there has been selling by speculators, but the big money, which mostly trades during regular trading hours, has not been selling so far.
At The Arora Report, we gain an edge by dividing money flows into three categories: momo (momentum) crowd, smart money and short squeeze. In the Morning Capsule that is made available to subscribers before the market open, we have been sharing for days that the momo crowd was buying in the early trade but the smart money was inactive.
That changed two days ago when we started sharing with our subscribers that the smart money was lightly selling. The initial dip in the pre-market was the result of the jitters when Nikkei 225 in Japan gapped up, went higher on optimism and then reversed to close lower. The jitters from this price action from Japan were carried to Europe and then to the U.S. Later on, the market was hit when it became known that the Senate bill did not call for cutting corporate taxes right away.
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What to do now
At The Arora Report, for timing, risk control and allocations, we depend on the highly complex adaptive ZYX Global Multi Asset Allocation Model. In plain English, “adaptive” means it changes itself with market conditions. The model is comprehensive in that it has inputs in 10 categories that truly matter. We simply leave out other data that do not reliably determine the course of the markets.
Based on the ZYX Global Multi Asset Allocation model, we answer for our subscribers the key question: “What to do now?” We specify appropriate cash levels and appropriate hedges. Currently the model does not see a crash but advocates for protective measures.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.