Weak Treasury Auction Taketh Away What The BOJ Gave To The Stock Market, Buying On Jobless Claims

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

Buying On Jobless Claims

Please click here for an enlarged chart of SPDR S&P 500 ETF Trust SPY which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

• The chart shows the stock market is consolidating in the support zone.
• Investors should carefully watch if the stock market breaks above the support zone or below the support zone.
• The chart shows that RSI is oversold.  Oversold markets tend to bounce.
• The chart shows that the stock market was on the verge of dropping the day before yesterday.
• The chart shows that the market rallied earlier in the day yesterday on the Bank of Japan (BOJ) statement that the BOJ would not raise rates when financial markets are unstable. The statement helped those who borrowed in yen to buy the Magnificent Seven and other AI stocks to stop selling and even add new carry trade positions.
• BOJ July 31 meeting minutes released overnight are hawkish.  One member thought that at least 1% would be an appropriate neutral interest rate.  For reference, the present rate is 0.25%.
• The Treasury auction was weak.  The weak Treasury auction started a cascade of selling.  As a reader of The Arora Report, you already knew that the supply of U.S. Treasury bonds is so high that a big risk to the stock market is weak auctions.  As a matter of fact, on Monday, when Treasury bonds rallied and everyone was buying bonds, The Arora Report gave a signal to take advantage of the strength to short the bond ETF TLT or buy inverse bond ETF TBT.  That call has now proven spot on as the bonds were shorted right at the top.  The trades are profitable.  Here are the details from the Treasury auction:
  • $42B 10-year Treasury note auction results
  • High yield: 3.960% (When-Issued: 3.929%)
  • Bid-to-cover: 2.32
  • Indirect bid: 66.2%
  • Direct bid: 16.0%
• There is a $25B auction of 30-year Treasury bonds today.  If the auction results are weaker, expect another market drop.  On the hand, the market may rally if auction results are better than expected.
• The stock market has now become ulta-focused on jobless claims as Wall Street is beginning to recognize that initial jobless claims is a leading indicator.  Of course, as a reader of The Arora Report, you already knew that jobless claims is a leading indicator that carries heavy weight in the adaptive ZYX Asset Allocation Model with inputs in ten categories. In plain English, adaptiveness means that the model changes itself with market conditions.  Please click here to see how this is achieved.  One of the reasons behind The Arora Report's unrivaled performance in both bull and bear markets is the adaptiveness of the model.  Most models on Wall Street are static.  They work for a while and then stop working when market conditions change.  Here are the key points:
  • Initial jobless claims came at 233K vs. 240K consensus.
  • Stocks are being aggressively bought on this data on the assumption that this data indicates the jobs picture is not slowing as fast as feared.
  • As a reader of The Arora Report, you already know that aggressive buying on this data is highly flawed because this data is highly volatile.  For a country as big as the U.S., 6,000 fewer jobless claims is hardly something to hang your hat on.
  • As we have shared with you before, prudent investors should look at a four week moving average of initial jobless claims.
• Expect a high degree of volatility in stocks, bonds, gold, and oil.  Expect bitcoin to continue to move at the mercy of bitcoin whales.

Magnificent Seven Money Flows

In the early trade, money flows are positive in 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.

In the early trade, money flows are mixed in S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ).

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust GLD.  The most popular ETF for silver is iShares Silver Trust SLV.  The most popular ETF for oil is United States Oil ETF USO.

Bitcoin

Bitcoin BTC/USD is seeing buying.

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.

A protection band of 0% would be very bullish and would indicate full investment with 0% in cash.  A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.

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 big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, the DJIA rally to 30,000 when it was trading at 16,000, the start of a mega bull market in 2009, and the financial crash of 2008. Please click here to sign up for a free forever Generate Wealth Newsletter.