Aggressive Momo Buying On BOJ Action, Bearish Technical Pattern, Consumers Splurge

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

Bank Of Japan

Please click here for a chart of SPDR S&P 500 ETF Trust SPY.

Note the following:

• The chart shows that the stock market traced an outside reversal day. An outside reversal day is a bearish pattern. The last time this pattern occurred was in November 2021, and subsequently the stock market fell about 6.5%.
• This bearish pattern was triggered by a Tweet regarding the Bank of Japan.
• In yesterday’s Afternoon Capsule, we shared with you in advance:

There is a report that tomorrow, Bank of Japan (BoJ) will discuss changes to the yield curve. If BoJ makes a major change, it will have major negative implications for the U.S. stock market.

• When the Fed and ECB raised rates, BoJ kept its monetary policy easy. Finally, BoJ is moving towards the end of the decade-long easy monetary policy. Here is a simplified, easy way to understand what is happening.
  • BoJ has decided to allow the yield on 10 year Japanese government bonds to rise up to 1%. Previously, BoJ had capped the yield at 0.5%.
  • BoJ left its interest rates unchanged.
  • In The Arora Report analysis, BoJ’s policy shift will take place gradually, is negative for the U.S. stock and bond markets due to the carry trade, and presents an opportunity to buy yen and other Japanese assets.  
  • The Arora Report has given a new signal to buy yen. The signal is in ZYX Allocation. ZYX Allocation also has a buy zone for Japanese stocks.
  • After initial volatility on BoJ’s announcement, the momo crowd is aggressively buying stocks on BoJ not raising its rate. The momo crowd is ignoring the band expansion. This is keeping with the recent trend for investors to buy by focusing on the positive news and ignoring the negative news.  
• The U.S. economy is about 70% consumer based. Therefore, The Arora Report pays significant attention to the personal income and spending data. The latest data shows that personal income did not rise as much as expected, but consumers splurged by spending more than expected.  Here are the details:
  • Personal Spending came at 0.5% vs. 0.3% consensus.
  • Personal Income came at 0.3% vs. 0.5% consensus.
• The Fed’s favorite inflation gauge PCE came at 0.2% vs. 0.2% consensus.
• The Employment Cost Index came at 1.0% vs. 1.1% consensus.
• Buying is especially aggressive in the magnificent seven stocks. The magnificent seven stocks are 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. Money is flowing in Invesco QQQ Trust Series 1 QQQ.
• As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

Europe

Inflation expectations among consumers dropped to 4.8 vs. 6.0 prior.

GDP in France grew by 0.5% quarter-over-quarter vs. 0.1% consensus. Consumer Price Index (CPI) in France came at 4.3% year-over-year vs. 4.3% consensus. Month-over-month CPI came at 0.0% vs. 0.2% consensus.

In Germany, GDP came at -0.2% quarter-over-quarter vs. 0.1% consensus.

China

The Chinese government is seeking advice from stock brokers on how to run up the stock market.

Momo Crowd And Smart Money In Stocks

The momo crowd is aggressively buying stocks in the early trade. Smart money is inactive 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 buying oil in the early trade. Smart money is inactive in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin is range bound.

Markets

Our very, very short-term early stock market indicator is positive but can quickly turn 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 🔒 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. To see the locked content, please click here to start a free trial.

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.

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.