Major Risk To The Stock Market In Four Days - Smart Money Paying Attention But Momo Crowd Oblivious

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

Major Risk Ahead

Please click here for a chart of Invesco QQQ Trust Series 1 QQQ.

Note the following:

• There is a major risk to the stock market in four days coming from China.
• Right now, prudent investors are paying close attention to Taiwan.  Prudent investors look ahead. As usual, the momo crowd is oblivious because the momo crowd is mostly caught up in the present momentum and does very little good analysis.
• The chart shows Taiwan Semiconductor Mfg. Co. Ltd. TSM compared to QQQ.
• Taiwan Semiconductor is based in Taiwan. Foxconn, the manufacturer of iPhones, is also headquartered in Taiwan. The Taiwan economy is rich with technology. Taiwan ETF EWT is 62% technology based.
• The chart shows TSM lagging behind QQQ. TSM has underperformed by 23.8% despite being the manufacturer of the chips that power artificial intelligence. We would not be in the golden age of AI without TSM.  
• NVIDIA Corp NVDA and Advanced Micro Devices, Inc. AMD stocks are running up on a renewed AI frenzy. AI chips from both companies are manufactured by TSM. TSM also manufactures the brain of iPhones. At this time, there is no other company in the world that can match the advanced manufacturing capabilities of TSM. TSM stock is not getting a premium because of the China risk.
• TSM just reported earnings.  However, it is not the earnings that are driving the stock; it is the China risk.
• TSM has traded as high as $145 in January 2022. At that time, NVDA traded at $284.80. Now, NVDA is trading at $535 and TSM is trading at $102.
• TSM has underperformed due to the risk of a potential invasion of Taiwan by China.  We have been sharing with you that prudent investors need to be aware of the China risk.
• The Taiwan presidential election will be held on January 13.
• China has threatened to invade Taiwan if the pro-independence candidate Lai Ching-te of the Democratic Progressive party is elected.  
• Lai Ching-te is leading in the polls by 3% - 10%.
• Taiwan’s elections are regarded as the most free in the world. China is attempting to influence the outcome.
• If China invades Taiwan, it will be a huge negative for the stock market.
• In the early trade, the U.S. stock market is consolidating, waiting for CPI data tomorrow.
• 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.

Japan

Nikkei in Japan went up 2% on speculation that the Bank of Japan will maintain its easy monetary policy longer as inflation cools in Japan. As we have been sharing with you, Bank of Japan policies can have a significant impact on the U.S. stock market.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Nvidia (NVDA).

In the early trade, money flows are neutral in Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOG, Meta Platforms Inc META, Microsoft Corp MSFT, and Tesla Inc TSLA.

In the early trade, money flows are negative in Apple Inc AAPL.

In the early trade, money flows are negative 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 🔒 in the early trade. To see the locked content, please click here to start a free trial.

Gold

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

Iran based Houthis in Yemen have fired more missiles at ships in the Red Sea. This is causing a run up in oil.

API crude inventories came at a draw of 5.215M barrels vs. a consensus of a draw of 1.2M barrels.

The momo crowd is buying oil in the early trade. Smart money is 🔒 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 ran up to $48,000 yesterday evening after a hacker got control of the SEC’s X account and posted a false tweet that bitcoin ETFs were approved.  Bitcoin fell back to about $45,000 when SEC denied that bitcoin ETFs were approved.

The consensus in the market is that bitcoin ETFs will be approved today.  However, prudent investors should note that there is significant risk to the downside if the ETFs are not approved.

Most importantly, professional investors are hedging their bitcoin positions to protect against a sell the news reaction but retail investors continue to buy bitcoin without hedging.  

Markets

Our very, very short-term early stock market indicator is 🔒.  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 🔒 in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. 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 external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.