Momo Gurus Predict Demise Of Dollar Bull Run, China Data Tempers Enthusiasm For Stocks

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

Dollar Predictions

Please click here for a chart of Invesco DB US Dollar Index Bullish Fund UUP.

Note the following:

• The chart shows that the dollar has dropped recently into the support zone.
• The chorus of momo guru predictions that the dollar bull run has ended is picking up steam again. Keep in mind that momo gurus tend to be perma dollar bears for several reasons.
  • Stories of the dollar’s demise generate high viewership on television, high page views on the internet, and large subscription sign ups for newsletters.
  • Momo gurus’ job is to run up the stock market. Stories of the dollar’s demise help the stock market in the short term.
• Momo gurus have been predicting the dollar’s demise and have been consistently wrong, but this time there is good reason to be concerned about the dollar. The reason is that currencies move based on relative interest rates. The Fed is mostly done raising interest rates. Even the most aggressive predictions for Fed rate hikes are for two more hikes. The European Central Bank is behind the Fed in reaching the terminal rate and so is the Bank of Japan.
• S&P 500 companies derive significant revenue from overseas. When overseas profits are converted into dollars, the profits go up when the dollar is weaker.  For this reason, a weak dollar helps the stock market go up in the short term.
• In the long term, a weaker dollar is not good for the U.S. A strong currency is the hallmark of a strong country.
• Nobody is talking about the impact of a weaker dollar on inflation in the U.S., but prudent investors should pay attention. Have you ever tried to buy consumer goods made in the U.S.?  The U.S. is a large importer, especially of consumer goods from China. A weaker dollar causes the cost of imports to go up.
• Historically, the biggest beneficiary of a weaker dollar is emerging markets. Investors may want to consider slowly increasing their allocation to emerging markets.  Please see the “Accelerating Wealth Generation” section of the Trade Management Guidelines. Growth is in emerging markets, but it is important to be selective.  ZYX Emerging has continuously covered 14 emerging markets for 16 years.
• The bullish enthusiasm for stocks is being slightly tempered this morning by economic data from China.  GDP grew by 6.3% year-over-year vs. 7.1% consensus.  However, below the surface, the news is actually good if you look at quarter-over-quarter instead of year-over-year.  Q2 GDP grew 0.8% quarter-over-quarter vs. 0.5% consensus.  Prudent investors should pay attention to quarter-over-quarter data even though the stock market is paying attention to year-over-year data. The reason is that year-over-year data is stale.  
• The deluge of earnings will start tomorrow.
• Money flows in the magnificent seven stocks are mixed.  This is a departure from the usual positive money flows in the magnificent seven stocks.  However, this may change as the day progresses.  Expect retail investors to be buying the magnificent seven stocks based on pumping in the media over the weekend. The magnificent seven stocks are Apple Inc AAPL, Amazon.com, Inc AMZN, Alphabet Inc Class C GOOG, Meta Platforms Inc META, Microsoft Corp MSFT, NVIDIA Corp NVDA, and Tesla Inc TSLA.
• 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 inactive in the early trade.

Gold

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

The momo crowd is like a yoyo in oil in the early trade.  Smart money is inactive in the early trade.

For longer-term, please see oil ratings.

Bitcoin

There is disappointment that whales did not run up bitcoin BTC/USD over the weekend.

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.