Bonds And Fed Front And Center As Bonds Approach Bottom Support Zone After Trump Win

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

Bonds Fall On Trump Win

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

Note the following:

• After Trump's win, bonds are front and center.
• The chart shows when the contrary Arora call was made that bonds would fall.  That call was made at a time when everyone was predicting that bonds would rise. 
• The chart shows when the Arora call was made about the election.  We wrote in the Morning Capsule on October 8, "In the event of a one party sweep, TLT can potentially fall to the bottom support zone."
• The chart shows that the second Arora call on bonds has proven accurate after Trump's win.
• The chart shows when Trump won the election.
• The chart shows that on Trump's win, TLT gapped down and opened close to the top and of the bottom support zone.  Yesterday's bar does not show premarket data.  In the premarket, TLT touched the top band of the support zone.  On The Arora Report charts, premarket data is included on the current day, but not on the previous days.  This methodology provides the most clarity.
• The FOMC will announce its rate decision at 2pm ET, followed by Powell's press conference at 2:30pm ET.
• The consensus is that the Fed will cut rates by 25 bps.
• In The Arora Report analysis, the Fed could not possibly be happy about the large drop in bonds after the last rate cut.  We will be paying careful attention to what Powell says about the drop in bonds in his press conference.  If Powell says anything about this subject, it will be the most important new information that can be gleaned today.  
• Most institutional investors and many retail investors have suffered massive losses in bonds.  It is important to remember that the largest amount of money is still managed using the 60/40 portfolio as a starting point.  This means 60% in stocks and 40% in bonds.  The Arora Report has long shown that following the protection band is heads and shoulders above following the 60/40 portfolio.  Nonetheless, the dogma of 60/40 remains popular.  This is the reason we publish information on 60/40 portfolios.  For those following the 60/40 portfolio, The Arora Report call has been to limit the duration to less than five years.  The Arora Report call on duration has been consistent at a time when a vast majority of money managers were significantly increasing duration. The longer the bond duration, the larger the losses investors have suffered.
• In The Arora Report analysis, after Trump's election the Fed is faced with two important issues:
  • In The Arora Report analysis, depending upon how Trump implements his tariff plan, it may add 0.5% – 1% to inflation.  
  • According to the nonpartisan Committee for a Responsible Federal Budget, Trump's tax plans will increase the national deficit by $7.8T over the next 10 years.  All of this deficit will have to be financed by borrowing.  This will increase the supply of Treasuries.  A higher supply of Treasuries will lead to higher interest rates on the long end, unless the Fed decides to manipulate it with quantitative easing or some other artificial method.
• At a time when the stock market is at an all time high and bonds are suffering major losses, there is not good news on the economic data front.  
  • Unit labor costs are spiking.  Q3 Unite Labor Costs – Preliminary came at 1.9% vs. 0.5% consensus.
  • As of this writing, the momo crowd is oblivious.  However, expect smart money to pay attention to this important, highly inflationary data. Also expect the Fed to pay attention to this data.
• Initial jobless claims came at 221K vs. 222K consensus.  This indicates that the employment picture remains strong, especially at the low end.
• In The Arora Report analysis, there is another important question that the Fed will have to face.  Trump plans to deport undocumented immigrants.  According to the Department of Homeland Security, there are about 11M undocumented immigrants in the U.S. What happens to labor supply at the low end if 11M workers are taken out of the workforce?  What does it do to inflation?  What does it do to economic growth, and in turn the stock and bond markets? 

England

The Bank of England has cut interest rates.  The key interest has been reduced to 4.75% from 5%.

This is the first cut by a major central bank after Trump's election.   Investors should keep an eye on how the European Central Bank and the Bank of Japan act after Trump's election.  Remember, the U.S. economy is intertwined with the global economy.  

Magnificent Seven Money Flows

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

In the early trade, money flows are negative in Tesla Inc TSLA.

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

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 range bound.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.  The proprietary protection band from The Arora Report is very popular.  The protection band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.

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.