Hedges Turn Very Profitable, Good Jobs Report, China Retaliates

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

Hedges Turn Very Profitable

Hedges have turned very profitable. The strategic portfolios have been protected with different kinds of hedges.

• Portfolios have been protected up to 57% with overall portfolio hedges plus cash coming into the stock market dip. Now, partial profits have been taken.  Coming into this morning, the protection band stood at up to 50%.  Now after more profit taking, the protection band will stand at up to 47%.
• Hedges on individual positions
• Precious metals, including gold and silver, up to 8%
• Short positions 

It is time to take some profits on some hedges.

Good Jobs Report

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 prior support zone 1 has now turned into a resistance zone.
• The chart shows that earlier this morning the stock market approached the low band of support zone 2.  This is a logical place for the stock market to bounce. As of this writing, a bounce is exactly what is happening.
• RSI on the chart shows the stock market has become very oversold.  Oversold markets tend to bounce.
• The chart shows that the drop yesterday was on higher volume.  This indicates that the momo crowd is finally booking losses.  In our analysis, most of these losses are being taken due to margin calls.  The volume is not high enough to indicate capitulation.  Other signs of capitulation are also missing.  If the stock market bounces from here, it will be without capitulation.  The market bouncing without capitulation typically does not form an enduring bottom.
• This morning, the stock market plunged when China announced 34% retaliatory tariffs.
• Yesterday evening, President Trump indicated that he is open to negotiations if other countries offer phenomenal deals.  This is contrary to what other cabinet members said yesterday.
• In our analysis, President Trump's statement would have helped the stock market rally, but China retaliating gives a cover for other countries to retaliate.  This was the main reason for the plunge this morning.
• The stock market started rallying from its lows on a good jobs report.  Here are the details:
  • Nonfarm payrolls came at 228K vs. 130K consensus.
  • Nonfarm private payrolls came at 209K vs. 120K consensus.
  • Average hourly earnings came at 0.3% vs. 0.3% consensus.
  • Average work week came at 34.2 hours vs. 34.2 hours consensus.
  • Unemployment rate came at 4.2% vs. 4.1% consensus.
• In our analysis, the jobs report is not as good as it seems on the surface.  There are many issues with this jobs report. To illustrate the point, here are two examples:
  • The jobs report claims that only 4K federal employees have been laid off.  Everyone knows that this is not true.  It appears that the anomaly has to do with the timing of the survey.
  • The prior jobs number has been revised down to 117K from 151K. 
• In our analysis, the stock market rallied from the lows on the belief that all of the uncertainty caused by tariffs has not seeped into the real economy yet.  
• In our analysis, the foregoing market belief is wrong because the stock market is not paying attention to details below the surface of the jobs report.  You can not really blame the market because the jobs report was released at 8:30am ET and there has not been enough time for an average analyst to grasp the details.  Having said that, the fastest guns are already reaching the conclusion we are sharing with you in this article.   
• Fed Chair Powell will speak at 11:25am ET.  We will be carefully listening to see if the Fed is planning an emergency rate cut.  Powell's speech is likely to be market moving.  

Magnificent Seven Money Flows

In the early trade, money flows are negative 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 negative in S&P 500 ETF (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 is range bound.

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.