Oil And Bonds Predict A Recession — Stock Market Caught Up In AI Frenzy Sees No Landing

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

Oil Predicts Recession

Please click here for a chart of Crude Oil Front Month CLY.

Note the following:

• Oil is predicting a recession.
• The chart shows the spike up in oil when Saudi Arabia unilaterally cut production by 1M bpd.
• The Saudi Arabia production cut was announced on a Sunday. The chart shows that after opening higher, oil closed near the lows.
• The reason oil was not able to rally from Saudi Arabia’s oil production cut was fear of a recession.
• The chart shows that the dip in oil led oil to fall to the support zone followed by a rally. The rally was in sympathy with the stock market belief that there will not be a recession.
• In spite of the stock market buying on momo gurus predicting no landing and urging their followers to buy stocks because of artificial intelligence, the chart shows that oil has significantly pulled back over the last two days. The reason is renewed fears of a recession.
• The chart shows that oil is now just above the top band of the support zone.
• One argument stock market bulls are advancing is that the drop in oil is due to lack of growth in China. In The Arora Report analysis, there is some truth to this narrative, but it is not the entire story.  
• Bonds are also predicting a recession. The negative yield spread between 10-year Treasuries and 2-year Treasuries is 1.005% as of this writing. This is predicting a recession.
• In The Arora Report analysis, AI is real and a fortune is to be made over the next seven years. However, it will not be a straight line. At times, it will be treacherous. Remember that at one time, Amazon.com Inc. AMZN lost 95% of its value.  Serious investors intending on making a fortune from AI need to stay highly disciplined, follow a proven system with a  long track record such as the combination of adaptive ZYX Asset Allocation Model and the unique ZYX Change Method.  
• Further, in The Arora Report analysis, the stock market is totally focused on the benefits of AI but is underestimating the expense as corporations shift to using AI. When the likes of NVIDIA Corp. NVDA, Microsoft Corp. MSFT, Amazon, and Alphabet Inc. Class C GOOG are making money from AI, it is an expense to their customers.  There are very few stand alone beneficiaries of AI, such as Tesla Inc. TSLA. All in all, AI is not going to change the natural business cycle in the near term.  In this respect, the bullish AI narrative that has investors excited is highly flawed.  

Europe

Just released Flash PMI data is indicating that economic contraction is deepening in Europe. Here are the details:

• Flash Manufacturing PMI came at 43.6 vs. 44.8 consensus.
• Flash Services PMI came at 52.4 vs. 54.5 consensus.

A PMI of less than 50 indicates economic contraction.

Momo Crowd And Smart Money In Stocks

The momo crowd is buying stocks in the early trade. Smart money is selling stocks in the early trade.

Gold

The momo crowd is buying gold in the early trade. Smart money is inactive in the early trade.

For longer-term, please see gold and silver ratings.

Oil

The momo crowd is selling oil in the early trade. Smart money is inactive in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin to United States Dollar (BTC/USD) is staying above $30,000 on excitement over filings by BlackRock Inc. BLK and Wisdomtree Inc. WT for bitcoin ETFs. Sophisticated bitcoin investors are also buying ahead of bitcoin halving in April 2024.  

Markets

Our very, very short-term early stock market indicator is negative. 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 21% - 39% in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 3% - 6%, and short term hedges of 5% - 8%. 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 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.