Law Of Unintended Consequences Hitting Stock Market, French Nuclear Weapons To Defend Europe

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

Unintended Consequences

Please click here for a chart of German bunds (BUND).  Bunds are German government bonds.

Note the following:

• It is important for investors to set their politics aside, go to neutral to examine events without bias.
• The law of the unintended consequences of change is finally hitting the stock market in the U.S. in the early trade.
• The chart illustrates the law of unintended consequences.
• The chart shows when the Trump Zelenskyy confrontation occurred at the White House.
• The chart shows a big drop in bunds.  The drop in bunds is the worst since 1990.  
• Yields move inverse to the bonds.  When bonds fall, yields rise.  Yields across Europe are spiking.
• It is not only Europe, yields in Japan hit a near 16-year high.  As full disclosure, this is benefiting The Arora Report’s ZYX Allocation Model Portfolio through the yen ETF position Invesco CurrencyShares Japanese Yen Trust (FXY).
• Higher yields across the globe are now migrating to the U.S.
• ISM data yesterday was strong, further putting pressure on yields in the U.S.
• In the early trade, there is selling in the U.S. stock market as investors wake up to rising yields.
• During President Trump's first term, we learned to focus on what Trump was trying to do and not on his methods.  Irrespective of your opinion of Trump's method, Trump was trying to pressure Ukrainian President Zelenskyy towards peace over many more years of war.  Little did Trump know of the unintended consequences
• The unintended consequence of the Trump Zelenskyy confrontation was that alarm bells rang in Germany.   The alarm bells were that the U.S. is no longer a reliable ally under President Trump.   No German would want President Trump from the U.S. to dictate that Germany gives concessions to Russia in the event of a war with Russia.
• Since World War II, Germany has been highly dependent on the U.S. for defense.  Everything changed overnight after the Trump Zelenskyy confrontation.  Germany realized that they have to be able to defend themselves independent of the U.S.  The problem Germany faces is its tradition of austerity and constitutional limits.
• We previously wrote:

Historically, the German government has been the most fiscal responsible in the entire world.

Friedrich Merz, Chancellor-In-Waiting, is proposing to amend the constitution to exempt defense spending from fiscal spending limits.

• Merz said, "In view of the threats to our freedom and peace on our continent, the rule for our defense now has to be ‘whatever it takes.”  In terms of defense spending and austerity, the biggest change has happened in Germany almost overnight since World War II.
• It is the additional defense spending that is hitting the bund.
• As full disclosure, in The Arora Report there is a prior signal on European defense ETF Select STOXX Europe Aerospace & Defense ETF EUAD and English defense company BAE Systems PLC – ADR (BAESY).
• In a dramatic turn of events, France is proposing to use French nuclear weapons to defend Europe in order to reduce reliance on the U.S. 
• This morning the volatility is being illustrated by the jobless claims data.  Previously, we shared with you last week's data was weaker.  The just released data is stronger.  Initial jobless claims came at 221K vs. 234K consensus.
• The official jobs report will be released tomorrow at 8:30am ET and may be market moving.

Magnificent Seven Money Flows

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), Microsoft Corp (MSFT), NVIDIA Corp (NVDA), 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 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.