Here Is How To Look Ahead In This Market, China Dashes Stock Market Bulls Hopium, Bond Canary Sick

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

Look Ahead

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, along with this article, illustrates the power of looking ahead.  As important as it is to look ahead, it is equally important to learn what not to do.  The chart illustrates a powerful example of what not to do.  The chart shows the momo crowd fell into the trap of not looking ahead.
  • The chart shows that the momo crowd was buying Friday morning because the momo crowd believed that the stock market bottom was in place after the selloff on Thursday.
  • The chart shows a major drop on Friday after the momo crowd aggressively bought.   The drop caused the momo crowd to panic and sell near the lows.
  • Later on Friday and over the weekend, proclamations from momo gurus that Monday would see a crash like 1987 spread like wildfire.  As a reference, in 1987, the stock market fell over 20% in one day.
  • The chart shows the momo crowd panicked on Monday morning and sold at the lows.
  • The chart shows that the stock market rallied on Monday after the momo crowd sold.
  • On Tuesday morning, the momo crowd discovered that negotiations were ahead.  In our Monday's Morning Capsule.  We wrote:
  • "In the middle of all of this gloom, we would like to point out green shoots.
  • President Trump had a very positive call with the Secretary of the Communist Party of Vietnam.  Vietnam is indicating zero tariffs on U.S. goods.
  • Taiwan is choosing not to retaliate but instead to work with President Trump.
  • India is choosing not to retaliate and instead focus on a bilateral trade deal with the U.S.
  • Cambodia is choosing not to retaliate and is actively seeking to negotiate with the U.S.
  • Mexico is taking a measured approach and does not intend to engage in tit-for-tat tariffs.
  • The U.K. is taking a measured approach.
  • Elon Musk is floating the idea of a zero tariff trade zone between Europe and the U.S."
• On Tuesday morning, the momo crowd bought aggressively.  The momo crowd forgot that 50% additional tariffs on China were ahead.  Tuesday morning, when the stock market was running up like crazy, we wrote: “In the middle of the euphoria that has broken out this morning, Wall Street is not thinking ahead.”

• How will the stock market react if Trump goes ahead and imposes 50% additional tariffs on China?"
  • The chart shows when the stock market started realizing that additional China tariffs were ahead.
  • The chart shows that after the stock market realized China tariffs were ahead, the stock market fell.  The chart shows that the stock market drop picked up steam after the White House confirmed new China tariffs.
  • After buying near the highs in the morning, the momo crowd again panicked and sold near the lows yesterday.
  • The chart shows that early this morning, the momo crowd was buying again because China had not responded to the additional tariffs.
  • The chart shows that the stock market started falling again when China retaliated with 84% tariffs on U.S. goods.
• The foregoing illustrates the foolishness of not looking ahead and buying when the market goes up, only to sell when the market goes down.
• In our analysis, prudent investors need to understand the following:
  • To stay in control in China, for domestic reasons, President Xi cannot appear to have bowed to President Trump.
  • The U.S. strategy is to isolate China.  If the U.S. is successful in isolating China, China will have no choice but to give into President Trump.
  • China's strategy is to isolate the U.S.  If China is successful, President Trump will have no choice but to give into China.
  • It is a game of chess.  In our analysis, if President Trump is able to hold his nerve, the U.S. will be the likely winner.  If President Trump loses his nerve, China will be the likely winner.  
• The U.S. has an advantage for three reasons:
  • The U.S. is a trade deficit nation.  In a trade war, a trade deficit nation always has an advantage.
  • The U.S. consumer is very powerful compared to the Chinese consumer.
  • The U.S. has more allies than China.
• In our analysis, the U.S. is in a very good position with 70 countries, other than China, and is likely to come out way ahead compared to the present state of other nations continuously taking wealth out of the U.S. 
• For investors to fully understand what is happening and how it might end, investors may refer to the change curve that Nigam Arora described in his book titled "Theory ZYX of Successful Change Management: A Definitive Guide to Reach the Next Level." Nigam wrote in his book that when a major change is envisioned, those who have benefited from the status quo rise up with hue and cry.  The reason for hue and cry is that the change is like taking candy away from a baby.  On the flip side, since the change has not yet occurred, no one has benefited from the change.  There you have it – on one side you have a large segment of the population that will lose from the change, and on the other side, no one has yet benefited from the change.
• In our analysis, most major U.S. corporations and about 20% of the U.S. population have become significantly wealthier by the hollowing out of America.  These beneficiaries will be the losers from President Trump's policies.  The problem with the stock market is the 20% who have benefited are the ones who own stocks outside of retirement accounts.  On the flip side, about 50% of the U.S. population that has lost out from the hollowing out of America does not own stocks.
• In our analysis, if President Trump can hold his nerve, in the long run the change will be good for stock market investors.  As we have written before, the problem is the chasm in the short term.  Having said that, prudent investors should not ignore the risk in the long term if one of the following occurs:
  • President Trump loses his nerve.
  • President Trump loses public support in the U.S.
  • Instead of the U.S. succeeding in isolating China, China succeeds at isolating the U.S.
• Looking ahead, consider the following:
  • Follow one of the tenets of The Arora Report method to always be booking some profits.  From the Trade Management Guidelines: "The concept is to take partial profits to reduce risk and let the remaining position run for the profits to grow. The judicious combination of the two leads to maximizing risk adjusted returns over a long period of time over a large number of trades."
  • Since Trump's re-election, we have given 235 profit taking signals.  This is an example of practical actions in accordance with the principle explained above.  Investors who took advantage of the 235 profit taking signals now have some cushion as long term positions suffer.  
  • Following the protection band.
  • A judicious combination of long term strategic positions, short term tactical positions, cash, gold, and hedges. 
• In yesterday's Morning Capsule, we wrote:

"In our analysis, prudent investors should pay attention to bonds.  At this point in time, bonds are like a canary in the coal mine.  Bond yields have rapidly risen from their lows yesterday morning in a dizzying move.  Yields on 10 year Treasuries have risen from 3.865% yesterday morning to 4.226% as of this writing."

• The result of the $58B three year note auction showed weak demand.  This indicates that the canary is sick.  Here are the details of the auction:
  • High yield: 3.908%
  • Bid-to-cover: 2.70
  • Indirect bid: 62.5%
  • Direct bid: 26.0%
• At this time, consider paying attention to the protection band and paying attention to new signals.  For example, partial profits were taken on the Nvidia (NVDA) trade around position at $103.86 and $105.33 yesterday.  Earlier this morning, NVDA stock traded as low as $93.25.  The core NVDA position that is long from $12.55 has hedges.  These hedges have become very profitable.  Recently, partial profits were taken on the hedges.
• As of this writing, the dollar is experiencing a big drop.  The stock market is liking it, but this should be of concern to investors.  
• Important economic data is ahead. Consumer Price Index (CPI) and initial jobless claims will be released tomorrow at 8:30am ET.  Producer Price Index (PPI) will be released Friday at 8:30am ET.
• 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 like a yoyo in Apple Inc (AAPL), Amazon.com, Inc. (AMZN), Alphabet Inc Class C (GOOG), Meta Platforms Inc (META), Microsoft Corp (MSFT), (NVDA), and Tesla Inc (TSLA).

In the early trade, money flows are like a yoyo in S&P 500 ETF (SPY) and Invesco QQQ Trust Series 1 (QQQ).

The foregoing indicates a high degree of instability this morning.

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 is seeing selling.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.  Our proprietary protection band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.

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.