The Real Reason Behind Global Stock Carnage – Carry Trade Unwinds

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

Carry Trade Unwinds

Please click here for an enlarged chart of Invesco Currency Shares Japanese Yen Trust FXY.

Note the following:

• The chart shows the rapid rise in the yen.
• The chart shows that the rapid rise occurred after the Bank of Japan raised rates.
• As full disclosure, ZYX Allocation by The Arora Report has a long position in yen ETF (FXY). Click here to read where we previously wrote that FXY would act as a hedge. That call has now proven spot on. FXY is rising while stocks are experiencing carnage.
• We have been sharing with you for a while to keep an eye on actions from the Bank of Japan as they may have a large impact on global stocks, including U.S. stocks.
• Last week we shared with you that the Bank of Japan raised rates and the carry trade was beginning to unwind. Funds have been borrowing money in yen and buying stocks across the globe. Most notably, funds have been using money borrowed in yen to buy AI related semiconductor stocks and the Magnificent Seven stocks. This is the reason the Magnificent Seven and other AI stocks are now seeing aggressive selling.
• There are several other factors entering into the mix to drive stocks lower.
  • We have been sharing with you that sentiment had reached the extreme zone. We have also been sharing with you that when sentiment reaches the extreme, it is a contrary signal, i.e. a sell signal. Now we are seeing the aftermath of sentiment reaching the extreme.
  • Warren Buffett has become defensive.
    • Buffett's company, Berkshire Hathaway Inc Class B BRK, sold about half of its Apple Inc AAPL position.
    • BRK.B has reached a record $277B cash position on June 30 vs. $189B on March 31. This largely reflects Buffett selling about half of the AAPL position.
    • This is especially very important because it was only back in May when Buffett said AAPL was a core holding like Coca-Cola Co KO and American Express Company AXP. He has held KO and AXP for a very long time.
  • Delay in NVIDIA Corp NVDA next generation Blackwell chip.
  • Economic data is beginning to show slowing U.S. growth as we shared with you in Morning Capsules last week.  Please read last week's Morning Capsules, click here for details. The most notable pieces of data are:
    • ISM
    • Jobless claims
    • Jobs report
  • The momo crowd is facing forced selling due to margin calls.
    • Expect selling pressure to lift when early margin calls are done.
    • Expect another couple of waves of margin calls during the day unless the market rallies substantially.
    • Historically, the two times of heavy forced liquidation are around 10:30am ET and 1pm ET.
• In addition to the protection band that is protecting The Arora Report members' portfolios, there are additional hedges in the form of gold and silver, as well as hedges on semiconductor stocks and all of the Magnificent Seven stocks with the exception of Tesla Inc TSLA. TSLA is not a portfolio holding.
  • These additional hedges on semiconductor stocks and the Magnificent Seven stocks have now become profitable. Consider starting to book profits in small tranches on these hedges starting right now.  
• The stock market is very oversold and can quickly bounce after forced selling is done.

Magnificent Seven Money Flows

In the early trade, money flows are negative in Amazon.com, Inc. AMZN, NVDA, Microsoft Corp MSFT, Alphabet Inc Class C GOOG, Meta Platforms Inc META, TSLA, and AAPL.

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

The Arora Report call that Bitcoin BTC/USD is not a hedge is being proven right now. Bitcoin is being aggressively sold and is now approaching $50,000. Bitcoin whales unloaded bitcoin to unsuspecting retail investors last month.

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.