Hedges Become Profitable, Trump Stock Market Put Failed – Trump Has Bigger Fish To Fry

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

Take Partial Profits On Hedges

After the sell off, consider taking partial profits on hedges. 

Nibbling

Aggressive investors may consider nibbling stocks and ETFs that are entering buy zones.  Nibbling simply means entering very, very small tranches in existing recommendations.

As a caution, be sure to not gorge.  

Stock Market Put

Please click here for an enlarged chart of SPDR S&P 500 ETF Trust SPY which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

• The chart shows the stock market fell to the bottom band of support zone 1.
• When the stock market approaches the bottom band of a support zone, a bounce is expected.  This is exactly what happened yesterday afternoon.
• On March 4, we wrote: 

Unless President Trump changes his mind or the Fed changes its policy, the stock market going to the support zone is the highest probability scenario at this time.

• In the short term, here are the key points:
  • Selling yesterday was exaggerated by margin calls to momo crowd accounts.
  • At the end of the day, the stock market rallied as short sellers bought to cover on the stock market approaching the low band of the support zone.
  • In the evening, futures took another leg down on expectations of a selloff in Asia.
  • Markets stabilized in Asia.  Chinese stocks even gained.  Action in Asia brought in buying in the futures in the U.S.
• RSI on the chart shows the stock market is oversold.  Oversold markets tend to bounce.
• The chart shows the selloff yesterday was on higher volume.  This indicates that there was mild conviction in the selloff.  The volume needed to be higher than it was to wash out the sellers – this indicates a high probability of another leg down.    
• The chart shows the stock market is below the 200 day moving average.  We previously shared with you:

• The 200 day moving average is very powerful, and all investors should pay attention to it.
• The reason the 200 day moving average is so powerful is because legions of investors believe in it and act on it, and the media publicizes it.
• Other than the deeply held myth, the 200 day moving average does not have any special power.  Afterall, why not a 190 day or 210 day moving average?
• Rigorous analysis shows that the 200 day average by itself has no magical power.
• Legions of investors buy stocks when the stock market pulls back to the 200 day moving average because they erroneously consider the 200 day moving average as a major support.  There is no analytically valid basis for this myth.
• Legions of investors also sell stocks when the stock market breaks below the 200 day moving average.  Again, there is no analytical basis for this belief.
• Below are extremely important points for prudent investors to fully grasp. 
  • During President Trump's first term, the stock market had a Trump put.  In plain English, a Trump put meant that Trump did not allow a significant drop in the stock market.
  • Every time the stock market started to drop during his first term, Trump jumped into action.  For example, in December 2018, when the stock market started falling on the Fed raising interest rates, Trump relentlessly berated Fed Chair Powell.  Ultimately, Powell reversed course.  Powell's reversal caused the stock market to start a mega party. In the process, Powell sowed the seeds of inflation.
  • When Trump was re-elected, it was natural for investors to believe that once again the stock market had a Trump put.  Prudent investors need to remember that investors suffer from recency bias.   In plain English, recency bias means that most often, investors believe that the road ahead will be the same as the road behind.
  • This time, Trump has experience from his first term.  Instead of claiming the glory of the stock market going up during his presidency, Trump appears to have a bigger fish to fry.  The bigger fish is to truly make America great again.
  • An easy way for prudent investors to understand what Trump appears to be wanting to do is to think of investors in the U.S. as addicts who have been continuously fed intoxicating substances by the U.S. government over the last 20 years.  With borrowing and spending, it got so bad that no one would even talk about detox.  Whether you like Trump or dislike Trump, the fact is that he is the first president since Ronald Reagan who appears to have the guts to take the country through a detox.  Here is the key question for investors – will Trump carry through a full detox, or will he get distracted along the way?
• In the long run, detox is good for the country and for investors.  In the short run, detox may upset the apple cart.
• No one can deny that the U.S. government cannot continue with the following:
  • Massive borrowing and spending
  • Growing the national debt to unsustainable levels
  • Transferring massive wealth from the U.S. to other countries such as China
  • Paying for highly inefficient and bloated bureaucracy as well as massive frauds
  • Paying for the defense of Europe
• The JOLTS report was released at 10am ET.
• Consumer Price Index (CPI) is ahead on Wednesday at 8:30am ET, and Producer Price Index (PPI) will be released on Thursday at 8:30am ET.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Tesla Inc (TSLA).

In the early trade, money flows are neutral in Amazon.com, Inc. (AMZN), NVIDIA Corp (NVDA), Microsoft Corp (MSFT), and Meta Platforms Inc (META).

In the early trade, money flows are negative in Alphabet Inc Class C (GOOG) and Apple Inc (AAPL).

In the early trade, money flows are like a yoyo in S&P 500 ETF (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 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.