Power Of Oversold Bounce Overcomes Another Weak Treasury Auction

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

Weak Treasury Auction

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 that the stock market is consolidating around the support zone.
• RSI on the chart shows that the stock market has moved out of the oversold zone.
• The price action in the stock market today will depend on the battle between smart money and the momo crowd.
  • The momo crowd is buying on the belief that the correction is over and the Fed will come to the rescue.
  • Smart money is trying to reduce risk ahead of the weekend.
  • If a short squeeze starts, the market can go much higher. Today is a Friday. Short squeezes tend to start on Fridays.
• The pattern traced by the volatility index VIX suggests a fair probability of the correction being over.
• We shared with you yesterday that the stock market was oversold and oversold markets tend to bounce.
• The chart shows that yesterday the oversold bounce was so strong that it overcame a weak Treasury auction.  Here are the results of the Treasury auction:
  • $25B 30-year Treasury bond auction
  • High yield: 4.314% (When-Issued: 4.283%)
  • Bid-to-cover: 2.31
  • Indirect bid: 65.3%
  • Direct bid: 15.5%
• The price action on Thursday on a weak Treasury auction was directly opposite of the price action on Wednesday.
  • On Wednesday, the stock market fell out of bed after weak Treasury auction results were reported.
  • In anticipation of weak Treasury results on Thursday, many investors sold short.
  • On Thursday when the stock market did not immediately fall on weak Treasury results, short sellers started covering.  This buying led to a short squeeze, causing the stock market to go higher.
• In The Arora Report analysis, in view of the rising national debt and high deficits, from a macro perspective, prudent investors should be concerned about weak Treasury auctions. This is especially important because, under Yellen, the U.S. Treasury is manipulating the issuance to prevent weak Treasury auctions.  This is one of the elements that go into determining the protection band. Investors should pay attention to the protection band.  
• Overnight, futures were higher based on the momentum from yesterday. As we get closer to the opening, there is wider recognition that yesterday's rally was short covering and an oversold bounce. This is bringing in selling and stock futures have turned negative as of this writing.
• The foregoing illustrates that there are a number of crosscurrents that move the stock market. For example, those who predicted on Thursday that the Treasury auction would be weak were correct but the market reaction was opposite to what would have been expected by less informed investors.
• At least two Fed officials are not onboard with the market's demands for an emergency rate cut.
  • Fed President Tom Barkin expressed that there is time for the Fed to determine if action is required.
  • Fed President Jeffrey Schmid said that because inflation is still above the target and the labor market is healthy it is not time for a rate cut.

Magnificent Seven Money Flows

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

In the early trade, money flows are neutral in Amazon.com, Inc. AMZN.

In the early trade, money flows are negative in Apple Inc AAPL, Alphabet Inc Class C GOOG, Meta Platforms Inc META, and Tesla Inc TSLA.

In the early trade, money flows are mixed in SPY and Invesco QQQ Trust Series 1 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 has moved above $60,000 on hopes that bitcoin whales will run up bitcoin this weekend.

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.