Putin's Frankenstein Subdued But Investors Exuberant Over AI Need To Be Mindful Of The Tail Risk

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

Be Mindful Of The Tail Risk

Please click here for a chart of Invesco QQQ Trust Series 1 (NASDAQ: QQQ).

Note the following:

• The chart shows the steep trendline driven by the AI frenzy.
• The chart shows that QQQ has now fallen below the trendline.
• RSI on the chart shows that there is a fair probability of a pullback.
• As the momo crowd’s exuberance with AI continues, smart money is paying attention to the tail risk from Russia.
• Russia has the largest number of nuclear weapons.  Russia has an arsenal of 6850 nuclear weapons and 1634 are deployed. Most of the deployed weapons are pointing at Western Europe and North America.
• Irrespective of what you think of Putin, due to the large number of deployed nuclear weapons, the stability of Russia is important to the world and the financial markets.
  • Over the weekend, Yevgeny Prigozhin presented an unprecedented challenge to Putin. Prigozhin, a Putin creation, turned into Putin's Frankenstein.
  • Prigozhin went from a convicted criminal for robbing apartments to the owner of a hot dog stand to the owner of fancy restaurants to catering Putin’s parties and being known as Putin’s chef to the owner of the Wagner group. The Wagner group became the most powerful mercenary group in the world. The Wagner group is responsible for many of Russia’s victories in Ukraine.
  • Prigozhin led his men to capture a major Russian city and Russia’s Southern Military Command and then marched towards Moscow unopposed.
  • At the eleventh hour, a deal was struck that defused the crisis.  Prigozhin’s men were supposed to go back to their bases, and Prigozhin was supposed to leave for Belarus.
• There is no clarity as to exactly what is happening in Russia right now.
• Could Prigozhin’s mutiny simply be a ruse for something much bigger?  Is more instability ahead in Russia?

Momo Crowd And Smart Money In Stocks

The momo crowd is buying stocks in the early trade. Smart money is inactive in the early trade.

Gold

The momo crowd is buying gold in the early trade. Smart money is inactive in the early trade.

For longer-term, please see gold and silver ratings.

Oil

The momo crowd is buying oil in the early trade. Smart money is inactive in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin is range bound.

Markets

Our very, very short-term early stock market indicator is negative. This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding 21% - 39% in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 3% - 6%, and short term hedges of 5% - 8%. 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.

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.

The Arora Report is known for its accurate calls.  The Arora Report correctly called the 2008 financial crash, the start of a mega bull market in 2009, the COVID crash, the post-COVID bull market, and the 2022 bear market.  Please click here to sign up for a free forever Generate Wealth Newsletter.