Don't Ignore China Risk If You Are Caught Up In AI Frenzy, Euphoria Builds On Cooler CPI $2400 Gold

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

Cooler CPI

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 stock market is making a new high.
• The chart shows that the new high is on low volume, indicating a lack of conviction.
• The chart shows the stock market running up after the release of Consumer Price Index (CPI). Futures were negative before the release of CPI but moved higher after the release of CPI.
• CPI data is cooler than expected. Here are the details:
  • Headline CPI came at -0.1% vs. 0.1% consensus. This is the lowest since 2020.
  • Core CPI came at 0.1% vs. 0.2% consensus.
• Initial jobless claims came at 222K vs. 234K consensus. This indicates that the economy is staying strong.  Initial jobless claims is a leading indicator and carries heavy weight in our adaptive ZYX Asset Allocation Model with inputs in ten categories. In plain English, adaptiveness means that the model changes itself with market conditions. Please click here to see how this is achieved.
• In The Arora Report analysis, the probability of a rate cut in July is 40%. The probability of a rate cut in September is now 75%.  
• In The Arora Report analysis, prudent investors need to be aware of two risks in the face of extreme bullish sentiment:
  • A rate cut can lead to euphoria.  If euphoria occurs, prudent investors will need to be more tactical and enter more short term trades as euphorias tend to end in crashes.  
  • Prudent investors also need to be cognizant of a possible ‘sell the news’ reaction. Investors have been running up the stock market on hopes of a rate cut. There is a fair probability that smart money may start selling on a rate cut to lock in the gains. 
• Earnings season starts today.
  • Conagra Brands Inc CAG, PepsiCo Inc PEP, and Delta Air Lines, Inc. DAL kicked off earnings season.  Taken together, earnings, revenues, and projections, are below whisper numbers for all three.
  • Tomorrow will bring important bank earnings from JPMorgan Chase & Co JPM, Citigroup Inc C, and Wells Fargo & Co WFC. Expectations are very high.
  • An important earning tomorrow is from Fastenal Co FAST. Fastenal earnings are a good indication of spending on construction and infrastructure.
• Producer Price Index (PPI) will be released tomorrow at 8:30am ET. Investors will use PPI as confirmation of falling inflation.
• University of Michigan consumer sentiment will be released tomorrow at 10am ET. Consumer sentiment is important because for about 80% of consumers, liquidity has dried up.
• 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. The protection band is one of the large number of unique edges that are available to members of The Arora Report.

China

Yesterday, we shared with you that the momo crowd was aggressively buying Taiwan Semiconductor Mfg. Co. Ltd. TSM on AI euphoria, oblivious to the China risk.  Prudent investors need to be aware that China just sent 56 aircraft, the most ever, across a key boundary line with Taiwan.  The purpose seems to be to intimidate Taiwan into submission and warn the U.S. of China’s military might.  

China has put in place more short selling restrictions to help the Chinese stock market run up.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Amazon.com, Inc. AMZN, Microsoft Corp MSFT, NVIDIA Corp NVDA, and Tesla Inc TSLA.

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

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

Momo Crowd And Smart Money In Stocks

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.

Bitcoin

Bitcoin BTC/USD is seeing buying after the release of CPI.

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 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 seven 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.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.