Smart Money Sells Retail Favorites

Please click here for an enlarged chart of Palantir Technologies Inc (NASDAQ:PLTR).

Note the following:

• This article is about the big picture, not an individual stock.  The chart of PLTR stock is being used to illustrate the point.
• The chart shows smart money selling in PLTR stock.
• The chart shows PLTR stock has given up the gains since the last earnings report.
• The volume on the chart shows the drop yesterday was on heavier volume.
• The chart shows PLTR stock is near the top band of zone 1 (support).
• The chart shows PLTR stock has returned to the trendline.  A definitive drop below the trendline would be a negative.
• PLTR is in our Portfolio long from $20.15.
• As PLTR stock has dropped, investors also need to remember that PLTR stock has a path to become a $1T company.
• The chart shows our prior buy zone for PLTR stock which helped newer readers buy PLTR during the last dip.
• We previously wrote:

A raging bull market like we are in now sustains a high valuation, but if a bear market develops, a high valuation stock, such as PLTR, can be cut in half.

• We shared with you on August 4 that RSI on the PLTR chart showed divergence.  That divergence foretold the drop.
• RSI on the chart shows that PLTR stock is now oversold.  Oversold stocks tend to bounce.
• Prominent among the favorite stocks of retail investors that smart money was selling yesterday are PLTR, Strategy Inc Class A (NASDAQ:MSTR), IONQ Inc (IONQ), Rocket Lab Corp (RKLB), AST SpaceMobile Inc (ASTS), Advanced Micro Devices Inc (AMD), and Hims & Hers Health Inc (HIMS).
• In our analysis, smart money sold retail favorite stocks yesterday for two reasons:
  • Smart money is increasing protection ahead of Fed Chair Powell's Jackson Hole speech on Friday.  Smart money always controls risks.  In contrast, the momo crowd almost never takes risk into account and is fixated on rewards.
  • Smart money recognizes that the sentiment in the favorite stocks of retail investors is extremely positive.  As we have been sharing with you, extremely positive sentiment is a contrary indicator.
• There is a Treasury auction of 20 year bonds today.  The offering amount is $16B.  The auction results may be market moving, especially if the auction does not go well.
• The FOMC minutes will be released today at 2pm ET and may be market moving.
• Among important earnings this morning, Target Corp (TGT) reported below whisper numbers and appointed a new CEO.  Off-price retailer TJX Companies Inc (TJX) reported above whisper numbers.  Analog semiconductor company Analog Devices Inc (ADI) reported above whisper numbers.  Home improvement retailer Lowe’s Companies Inc (LOW) reported above whisper numbers.  LOW and ADI are in our portfolio.

Magnificent Seven Money Flows

In the early trade, money flows are neutral in Microsoft Corp (MSFT) and NVIDIA Corp (NVDA).

In the early trade, money flows are negative in Apple Inc (AAPL), Amazon.com, Inc. ( AMZN), Alphabet Inc Class C (GOOG), Meta Platforms Inc (META), and Tesla Inc (TSLA).

In the early trade, money flows are positive in SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust Series 1 (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).

Oil

API crude inventories came at a draw of 2.4M barrels vs. a consensus of a draw of 1.2M barrels.  The API data is bullish for oil.  However, in the longer term, the driving force for oil is the potential change in sanctions against Russian oil.

Bitcoin

Bitcoin continues to see selling after Treasury Secretary Bessent's comment that the U.S. will not be adding more bitcoins to the reserve.  However, Bessent has been trying to backtrack his comment after bitcoin started falling.  

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.

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.