Investors Suffering Cognitive Dissonance, Insane Demand For Nvidia Chips, Anxiety Builds About Israel And Iran

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

Cognitive Dissonance

Please click here for an enlarged chart of iShares 20+ Year Treasury Bond ETF TLT.

Note the following:

• The chart shows when the Fed rate cut was announced.
• At the time the Fed rate cut was announced, this was the landscape:
  • Wall Street firms were tripping over themselves to rush their clients into buying long bonds.
  • The momo crowd was aggressively buying long bonds.
  • Technically, long bonds had broken out.
  • Trading services were sending signals to their members to go all in on buying long bonds.
  • Almost everyone was predicting that bond yields would fall much lower.
• Long bonds move inversely to the yield.  When yield goes higher, long bonds fall.
• On the morning before the Fed rate cut announcement, The Arora Report made a bold call contrary to the prevailing wisdom.  The call was inline with prior calls that long bond yields may rise and long bonds may fall after the rate cut.  We wrote:

One unintended consequence may be a rise in long term yields in due course.

• The chart shows that long bonds have fallen and yields have risen.
• The chart shows that the breakout above the resistance zone failed.  Ironically, this breakout was the reason legions of investors who rely only on traditional technical analysis bought long bonds on the breakout. To make matters worse, most of such bond trading positions are taken on high leverage.  Due to high leverage, these positions now have substantial losses.
  • This is a cautionary tale that illustrates why investors should not rely solely on one form of analysis such as traditional technical analysis. Investors should rely on systems, such as The Arora Report system, that synergistically combine in an optimized manner the best elements of the following:
    • Macro analysis
    • Fundamental analysis
    • Technical analysis
    • Quantitative analysis
• Money is flowing into the safety of Treasuries due to anxiety about potential escalation of conflict in the Middle East.  In The Arora Report analysis, if it was not for the escalation in the Middle East, TLT would have been much lower now.
• Going forward, investors need to remember the probability adjusted risk reward ratio in long bonds is not great.  Long bonds will work only if there is a major recession or a major war breaks out.  However, investors need to remember that the stock market is counting on no recession. Investors are suffering from cognitive dissonance – they are buying stocks believing that there will not be a recession, they are buying bonds believing there will be a recession.
• If inflation starts rising again, investors in long bonds will experience major losses.  Investors are very short sighted and are also losing track of the fact that the election is not far away.  Both Trump and Harris are committed to more reckless borrowing and more reckless spending.  This will increase the supply of Treasuries.  How can a higher supply of Treasuries be good for long bonds?  The answer is that it is not good for long bonds.
• On the positive side, NVIDIA Corp NVDA, CEO Jensen Huang says Blackwell production is in full swing and the demand for Blackwell is insane.
• Also on the positive side, OpenAI has raised $6.6B in new funds at a valuation of $157B.  This valuation is significantly higher than the last round.
• Anxiety is building among investors regarding the upcoming strike on Iran by Israel.  There are reports that Israel wants to attack Iran's nuclear installations, but Biden is trying to restrain Israel.
• Initial jobless claims came at 225K vs. 223K consensus.  Jobless claims are not showing weakness in the jobs picture.  Powell saw weakness in the jobs picture, and that was one of his justifications for the 50 bps rate cut.  More information will become available about the jobs picture tomorrow when the official jobs report is released at 8:30am ET.  The jobs report has the potential to be a major market moving event.
• ISM Non-Manufacturing Index will be released at 10am ET.  The consensus is 51.6.  This data may be market moving.

China

The stock buying stampede in Hong Kong is slowing.  Mainland markets are closed.  Prudent investors are taking advantage of the rally to sell.  As full disclosure, The Arora Report’s plan continues to be to buy on a dip.  The Arora Report has new buy zones for Mainland China ETF Xtrackers Hvst CSI 300 China A Shs ETF Class A ASHR and Hong Kong ETF iShares China Large-Cap ETF FXI in The Arora Report’s ZYX Emerging.

India

Growth concerns are emerging in India.  Money is beginning to flow out of India and into China.  As full disclosure, The Arora Report has new signals on India ETF WisdomTree India Earnings Fund EPI, VanEck India Growth Leaders ETF GLIN, and iShares MSCI India Small-Cap ETF SMIN in The Arora Report’s ZYX Emerging.

Magnificent Seven Money Flows

In the early trade, money flows are positive in NVDA.

In the early trade, money flows are neutral in Microsoft Corp MSFT.

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

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

Bitcoin BTC/USD is seeing selling along with junk stocks.

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.