An Opportunity In Small Caps Or A Danger Sign, All Important CPI Ahead

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

Small Caps

Please click here for an enlarged version of the chart of small cap iShares Russell 2000 ETF IWM.

Note the following:

• The chart shows the 2021 high in small caps.
• The chart shows the high in small caps in 2023.
• The chart shows small caps are still well below the 2021 high.
• Small caps staged a big rally in 2023, but small caps have not rocketed to new highs like the S&P 500. This may be an opportunity for investors. Here is what investors should keep in mind:
  • IWM could be a catch up trade.
  • On the other hand, small caps should have performed better than they have.The difference could be explained due to the lack of high flying AI stocks in IWM, or the difference could be a warning.
  • Small caps are interest rate sensitive and should do well when the Fed cuts rates.
  • Small caps are economically sensitive. As such, small caps should do well if there is no landing.
  • IWM includes many banks. If there is no banking crisis, IWM should do well.
  • If the overall stock market maintains its gains, small caps provide an opportunity to investors.
• Fed speak is ahead. The Fed’s Michelle Bowman, Tom Barkin, and Neel Kashkari will be speaking today.
• Consumer Price Index (CPI) will be released Tuesday at 8:30am ET. The stock market is assuming that inflation will continue to go down. If CPI shows that inflation is continuing to come down, S&P 500 will rally. On the other hand, if CPI is stronger than expected, there is a lot of air in the stock market and as such may lead to a rapid pullback.
  • Momo gurus are already being proactive to prevent a selloff if the data shows that inflation is not coming down. The new mantra of momo gurus is that stocks will go up even if inflation does not come down. Keep in mind that momo gurus’ real job is to run up the stock market under the disguise of analysis.
• 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.

Magnificent Seven Money Flows

In the early trade, money flows are positive in NVIDIA Corp NVDA.

In the early trade, money flows are neutral in Apple Inc AAPL, Amazon.com, Inc. AMZN, Meta Platforms Inc META, and Microsoft Corp MSFT.

In the early trade, money flows are negative in Alphabet Inc Class C GOOG and Tesla Inc TSLA.

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

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 like a yoyo in gold in the early trade. Smart money is inactive in the early trade.

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

The most popular ETF for gold is SPDR Gold Trust GLD. The most popular ETF for silver is iShares Silver Trust SLV. 

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.

The most popular ETF for oil is United States Oil ETF USO.

Bitcoin

Bitcoin BTC/USD rallied to $48,795, where it met resistance. It is pulling back as of this writing on slight disappointment that whales did not push bitcoin to $50,000 over the weekend. Those who understand whales’ secrets know that whales are very smart, and they preserve the element of surprise, not always doing exactly what is expected.

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 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.

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 seven 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.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.