Bond Rally Drives Stock Market, Taiwan Semi Results Show AI Demand, Manipulators Having A Heyday With Quantum Computing

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

Bonds Are The Leading Indicator

A chart of iShares 20+ Year Treasury Bond ETF TLT.

Note the following:

• On January 10th, we wrote in the Morning Capsule:

Bonds are now very oversold.  For this reason, bonds may see a technical bounce.  The bounce in bonds means yields pulling back.  If yields pull back, the stock market will rally.

• The chart shows that bond ETF TLT previously touched the top band of the support zone.
• The chart shows that bonds rallied on cooler core CPI.
• The chart shows that bonds are now close to the bottom band of the lower resistance zone.
• RSI on the chart shows that bonds were very oversold prior to the rally.
• There was aggressive buying in the stock market yesterday, primarily on the rally in bonds. 
• The outsized rally yesterday was exaggerated for two reasons:
  • Positioning of Wall Street.  Positioning is a very important market mechanic.  Understanding positioning gives you an edge.
  • A vicious short squeeze occurred as many funds were positioned for a drop in the stock market.
• Here is another indication of extreme positive sentiment.  The market focused on 0.1% cooler core CPI but totally ignored the headline CPI that was hotter.  The headline CPI includes food and energy.  Prudent investors should note that people are still eating food and putting gas in their cars.  Gas prices are going up.  Is inflation really tamed as the stock market believed yesterday?  Looking forward, insurance costs for consumers are also going to go up after the Los Angeles fires.  The rise in insurance costs will not be limited to Los Angeles but will be felt across the country.
• Taiwan Semiconductor Mfg. Co. Ltd. TSM is the largest semiconductor manufacturer in the world. Taiwan Semiconductor is the manufacturer of semiconductors for Apple Inc AAPL and NVIDIA Corp NVDA. Taiwan Semiconductor reported blowout earnings on continued AI demand.  This is bringing more enthusiasm to AI stocks.
• The meme crowd is rushing headlong into quantum computing stocks such as IONQ Inc IONQ, Quantum Computing Inc QUBT, D-Wave Quantum Inc QBTS, Rigetti Computing Inc RGTI, SEALSQ Corp LAES, and Arqit Quantum Inc ARQQ.  The trigger is Microsoft Corp MSFT declaring 2025 the year to be quantum ready.  Microsoft has announced a new Quantum-Ready program.  Manipulators are having a heyday taking advantage of the meme crowd, just like manipulators did with earlier meme crowd favorites like AMC Entertainment Holdings Inc AMC and GameStop Corp GME.  In GME and AMC, the meme crowd lost their shirts, but manipulators made money like bandits.  Clearly, the meme crowd has not learned their lesson from the prior major losses.
• In The Arora Report analysis, quantum computing has significant potential to make money, but it has to be done carefully and patiently.  Under the present situation of quantum stocks becoming totally divorced from reality, the best course of action for investors is to be patient.  It is a grave mistake to emulate meme crowd behavior and become prey of the manipulators.
• Prudent investors pay attention to retail sales because the US economy is 70% consumer based.  Retail sales data is slightly weaker than expected:
  • Retail sales came in at 0.4% vs 0.5% consensus.
  • Retail sales ex Auto came in at 0.4% vs 0.5% consensus.
• Weekly initial jobless claims are creeping up.  Claims came at 217K vs 212K consensus. 

Magnificent Seven Money Flows

In the early trade, money flows are positive in Amazon.com, Inc., NVDA, MSFT, and AAPL.

In the early trade, money flows are neutral in Tesla Inc.

In the early trade, money flows are negative in Alphabet Inc Class C and Meta Platforms Inc.

In the early trade, money flows are neutral in SPDR S&P 500 ETF Trust and Invesco QQQ Trust Series 1.

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.  The most popular ETF for silver is iShares Silver Trust.  The most popular ETF for oil is United States Oil ETF.

Bitcoin

Bitcoin is rangebound trading just below 100,000.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.  The proprietary protection band from The Arora Report is very popular.  The 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.