Pay Attention: Investors Making Three Classic Mistakes In The Stock Market And Getting Burned, Money Flows In Magnificent Seven

Benzinga - by The Arora Report, Benzinga Contributor.

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

Three Classic Mistakes Please click here for a chart of Nextera Energy Partners LP (NYSE: NEP).

Note the following:

• The Morning Capsule is about the big picture. The chart of NEP is being used to illustrate the point.
• NEP is a publicly traded limited partnership that owns interest in wind and solar projects, and natural gas infrastructure.
• NEP was formed by NextEra Energy Inc (NYSE: NEE). The largest asset of NEE is First Trust New Opprtnts MLP & Engy Fd (NYSE: FPL) which is a regulated utility that serves nearly half of Florida and is the third largest electric utility in the country.
• Both NEE and NEP have been aggressively promoted to investors by Wall Street and newsletters.
• Both NEE and NEP have been favorite investments of the dividend chasing crowd. Many individual investors have a large proportion of their portfolios in these stocks based on the pump on social media and other sites where the dividend chasing crowd congregates.
• The anecdotal evidence is that many such investors did not even read Wall Street’s analysis.
• There is also anecdotal evidence that many such investors do not even have rudimentary risk control.
• The chart shows that NEP has fallen from a 52 week high of $81.32 to $24.50.
• The chart shows that the drop in the stock from the high to about $48 is the first leg. This is due to rising interest rates.
• The chart shows that there is a second leg showing the stock falling from about $48 to $24.50 in four trading days.
• The second down leg occurred because NEP lowered its dividend growth rate due to higher interest rates making it unable to accretively add drop-downs from its parent NEE.
• The stock of the parent NEE has also fallen from the high of almost $90 to about $51.
• Why were investors buying NEP and NEE? They were chasing yields without understanding the business, the financials, and the impact of interest rates. The last dividend provided them with a 5.8% yield on NEP and 2.51% on NEE.
• NEE and NEP are not the only stocks. The dividend chasing crowd is getting burned in many stocks.
• Prudent investors need to make sure they are staying clear of the following mistakes that the dividend chasing crowd has been making.
  • The crowd gets very focused on the dividends without understanding the risks. It is important to pay attention to one of the Arora Principles: give precedence to return of capital over return on capital. This principle becomes especially important when the upside rewards are minimal but downside risks are great. How does a 5% dividend help when trying to get this dividend, an investor loses 72% of the value? The dividend chasing crowd has an answer that they believe in religiously. The answer is that the value of their portfolio does not matter; it is only the income that matters. As foolish as this kind of thinking is, it gets even worse for the dividend chasing crowd because ultimately dividends get cut.
  • The second classic mistake is this crowd does not keep up with the changing macro environment. The easiest and most time efficient way to keep up with the macro environment is to regularly read the Morning Capsules.
  • The third classic mistake this crowd makes is that for information, they rely on those who have an agenda without understanding that their information sources are not objective. The vast majority of this crowd does not subscribe to an objective resource such as The Arora Report.
• The momo crowd was running up stock futures earlier today until yields started rising again and smart money started selling. As of this writing, smart money selling has overwhelmed momo crowd buying.
• It is important to note that smart money holds large equity positions. Smart money is not selling wholesale, but rather trimming at the edges.
• JOLTS-Job Openings report will be released at 10am ET and may be market moving.
• As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the protection band.

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

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

Momo Crowd And Smart Money In Stocks The momo crowd is buying stocks in the early trade. Smart money is