AI Frenzy Cools, Yen Hammers Gold And Bitcoin, First Ever Joint Air Threat From Russia And China

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

GDP Brings Buying 

Please click here for an enlarged chart of Invesco QQQ Trust Series 1 QQQ.

Note the following:

• The chart shows a drop in QQQ.  The drop in QQQ was triggered by speculative sentiment pulling back.  As a reader of The Arora Report, you knew in advance that speculative sentiment could fall as a result of Tesla Inc TSLA earnings.
• The chart shows that QQQ is approaching the support zone.
• RSI on the chart shows that QQQ is now oversold.  Oversold markets tend to bounce.
• The chart shows that the volume was low on the selloff.  This indicates a lack of conviction in selling.
• Especially hard hit in yesterday’s selloff were AI stocks as the AI frenzy cools.
  • AI stocks that are semiconductor stocks are partially hedged in The Arora Report's portfolio.  The plan is to take profits on hedges if these stocks fall further.
  • As full disclosure, AI stocks in the portfolio include Apple Inc AAPL, Analog Devices, Inc. ADI, Applied Materials, Inc. AMAT, Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOG, Mongodb Inc MDB, Meta Platforms Inc META, Microsoft Corp MSFT, NVIDIA Corp NVDA, Micron Technology Inc MU, NXP Semiconductors NV NXPI, PG&E Corp PCG, Quanta Services Inc PWR, and Qualcomm Inc QCOM.
  • At present, the AI stock with the best risk reward ratio is MSFT.
  • As full disclosure, AI and technology ETFs of interest in The Arora Report's ZYX Allocation Model Portfolio are Global X Artificial Intelligence & Technology ETF AIQ, VanEck Semiconductor ETF SMH, and iShares US Technology ETF IYW.
  • The AI ETF with the best risk reward ratio at present is AIQ.
  • Keep in mind, risk reward ratios are dynamic and change.
• Since AI stocks have run up so much in 2024, even with yesterday’s selloff there is risk in buying AI stocks right here.
• Q2 GDP-Adv came at 2.8% vs. 1.9% consensus.  This stronger than expected data is bringing buying into the stock market.  The reason is that a part of the drop in the stock market yesterday was on concerns that the economy was weakening too fast.
• In The Arora Report analysis, investors should not be too enamored with buying on strong GDP data.  The reason is that GDP is a lagging indicator.  The Arora Report system that includes ZYX Change Method and ZYX Asset Allocation Model is based on leading indicators.
• Durable goods orders show weakness in transportation orders.  Here are the details:
  • Headline durable orders came at -6.6% vs. 0.4% consensus.
  • Durable orders ex-transport came at 0.5% vs. 0.2% consensus.
• Initial jobless claims came at 235K vs. 240K consensus.  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.  One of the reasons behind The Arora Report’s unrivaled performance in both bull and bear markets is the adaptiveness of the model.  Most models on Wall Street are static.  They work for a while and then stop working when market conditions change.
• The yen is rising on expectations that the Bank of Japan will raise rates.  The rising yen is hammering gold, bitcoin, and oil.  This is also bringing selling into the U.S. stock market as many funds borrow in yen and buy U.S. stocks.  As full disclosure, there is a position in yen ETF Invesco CurrencyShares Japanese Yen Trust (ARCA: FXY) in The Arora Report's ZYX Allocation Model Portfolio.  

Stunning Yen Rise

The Japanese currency yen is experiencing a stunning rise, reaching its highest level in two months against the dollar.  The reason is an expectation that the interest rate gap between the U.S. and Japan will narrow.

First Ever Joint Air Threat

For the first time ever, two Chinese and two Russian aircraft operating together challenged U.S. aircraft in Alaska.  This indicates that China and Russia sense weakness in the U.S. and are getting bolder. 

The momo crowd is oblivious, but prudent investors should pay attention to the protection band – this is one of the many geopolitical situations that is taken into account when determining the protection band.

Surprise China Rate Cut

The People’s Bank of China (PBOC), in a surprise, cut the interest rate on one year loans by 20 basis points to 2.3%.  This indicates that PBOC is stepping up to support China’s economy in the wake of slowing Chinese consumers.

Magnificent Seven Money Flows

In the early trade, money flows are positive in AMZN, META, and TSLA.

In the early trade, money flows are neutral in AAPL and MSFT.

In the early trade, money flows are negative in GOOG and NVDA.

In the early trade, money flows are negative in SPDR S&P 500 ETF Trust 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

Buying in Bitcoin BTC/USD on the Trump strategic reserve rumor is being countered by rising yen bringing selling into bitcoin.  

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 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.

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