Disconnect Between Rising Yields And AI Frenzy Driven Stocks Widens, Blow Out ADP Data

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

AI Driven Disconnect Widens

Please click here for a chart of iShares 7-10 Year Treasury Bond ETF IEF.

Note the following:

• The chart shows that the bond ETF has fallen to the support zone.
  • Bonds move inverse to the yield.
  • The reason IEF has moved down is because yields have risen.
• This is an important chart because stocks compete with bonds. 10 year Treasury bond yield is the reference benchmark to compare with stocks.
• In yesterday’s Afternoon Capsule, we shared with you that FOMC minutes were hawkish. Please read yesterday’s Afternoon Capsule for details.
• ADP is the largest private payroll processor in the country. ADP uses its data to give a glimpse of the employment picture ahead of the official jobs report that will be released on Friday at 8:30am ET.
  • ADP came at 497K vs. 245K consensus.
  • ADP data is a blowout number, indicating a very strong jobs picture.
• Weekly jobless claims came at 248K vs. 250K consensus. This is a leading indicator and carries heavy weight in the proven adaptive ZYX Asset Allocation Model with inputs in ten categories. ZYX Asset Allocation Model has a long track record of calling both bull and bear markets correctly better than any other model. The secret is that this model automatically changes itself with market conditions. Most models on Wall Street are static — they work for a while and then stop working when market conditions change.
• When the AI frenzy started, it disconnected the magnificent seven stocks from interest rates. The magnificent seven are Apple Inc AAPL, Amazon.com, Inc AMZN, Alphabet Inc Class C GOOG, Meta Platforms Inc META, Microsoft Corp MSFT, NVIDIA Corp NVDA, Tesla Inc TSLA. The popular Nasdaq 100 ETF Invesco QQQ Trust Series 1 QQQ has risen mostly due to the rise in the magnificent seven stocks.
• The disconnect between rising interest rates shown on the chart and the magnificent seven continues to widen.
• Take a look at the chart when IEF was in the support zone the last time and then see where the magnificent seven stocks were at that time. The magnificent seven stocks were significantly lower at that time.
• In The Arora Report analysis, such a wide disconnect is not sustainable. Here is the key question for investors: Will interest rates fall or will the magnificent seven pull back and in the process cause a pullback in S&P 500? 
• As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

Momo Crowd And Smart Money In Stocks

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

Gold

Gold is pulling back on rising yields.

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

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

Oil

Oil is pulling back on recession fears.

API crude oil inventories came at a draw of 4.382M barrels vs. a consensus of a draw of 1.8M barrels.

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

For longer-term, please see oil ratings.

Bitcoin

Bitcoin BTC/USD is seeing buying as BlackRock Inc BLK pushes for approval of bitcoin ETF.

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.