Protection Band Is The Answer For Investors - Wall Street Abandons Trump But Trump Appears Resolute

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

Wall Street Abandons Trump

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

Note the following:

• The chart shows the stock market is now in support zone 3.
• The chart shows the stock market touched the low band of support zone 3 early this morning.
• The chart shows that as of this writing, the stock market has bounced from the low band of support zone 3 to the top band.  The stock market is extremely volatile.  As an example, even a large stock like Microsoft Corp MSFT has traded as low as $337.88 and as high as $358.40 in the premarket.
• The chart shows the prior support zone 2 is now resistance zone 1.
• The chart shows volume was heavy on the drop on Friday.  This indicates conviction in the move.
• RSI on the chart shows the stock market is now very oversold.  Oversold markets tend to bounce.
• In overnight trading and early this morning, the fastest hedge funds are showing signs of capitulation.  However, retail investors, slower hedge funds, and institutional investors are not showing any signs of capitulation.  Instead of capitulating, such investors are buying.  Such buying can result in a bounce, but the bounce may not be an enduring bottom unless there is good news on the trade front.  
• Readers may recall our recent call to buy tactical positions on President Trump's re-election and sell them on Trump's inauguration.  In contrast, Wall Street's call was to aggressively buy until Wednesday of last week.  Wall Street had investors buying aggressively from the market top all the way to Trump announcing reciprocal tariffs – Wall Street had gone gaga over President Trump and simply did not believe what President Trump was saying.  Now that the stock market has experienced a significant drop over the last two days, Wall Street has turned against President Trump.  Now, Wall Street is selling after the drop.
• Wall Street is now urging President Trump to back off from the tariffs.
• President Trump is responding by being resolute on tariffs saying that the Fed should cut rates.
• In our analysis, it would be highly unwise for the Fed to cut rates.  Further, if the Fed were to cut rates, it would increase the probability of stagflation.  Think about this – if the Fed were to cut rates to counter tariffs and then in a short time Trump reaches great deals with several countries, will the Fed then raise interest rates? Fortunately for long term investors, in his speech on Friday, Fed Chair Powell did not promise rate cuts. 
• In the middle of all of this gloom, we would like to point out green shoots.  
  • President Trump had a very positive call with the Secretary of the Communist Party of Vietnam.  Vietnam is indicating zero tariffs on U.S. goods. 
  • Taiwan is choosing not to retaliate but instead to work with President Trump.   
  • India is choosing not to retaliate and instead focus on a bilateral trade deal with the U.S.
  • Cambodia is choosing not to retaliate and is actively seeking to negotiate with the U.S.  
  • Mexico is taking a measured approach and does not intend to engage in tit-for-tat tariffs.
  • The U.K. is taking a measured approach.
  • Elon Musk is floating the idea of a zero tariff trade zone between Europe and the U.S. 
• In our analysis, a positive scenario can emerge – President Trump starts announcing deals with several counties, and the stock market rallies.  Here is the key question: Will President Trump stand against Wall Street and some of his base?
• There is a wide range of outcomes possible – it is all in the hands of President Trump.  There are rumors that President Trump is planning on imposing new tariffs.  If new tariffs are imposed and no deals are struck with other countries, the stock market can go down another 15% – 20% from here.
• The best way for investors to handle the situation is to consider the following:
  • Follow the protection band
  • Follow hedges on individual positions
  • Differentiate between strategic positions and tactical positions
  • Have short positions.  If you do not short sell, it is time to start learning.
  • Large position in gold.  However, keep in mind that as the momo crowd gets margin calls, they often sell gold because they have no other choice.  
• Important economic data is ahead.  Consumer Price Index (CPI) and initial jobless claims will be released Thursday at 8:30am ET, and Producer Price Index (PPI) will be released Friday at 8:30am ET.

Magnificent Seven Money Flows

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

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Bitcoin

Bitcoin has cracked below $80K.  Many bitcoin bulls are very disappointed because bitcoin gurus had sold them the premise that bitcoin would protect them against a drop in the stock market.  More difficult than bitcoin for crypto bulls is that smaller coins are getting hurt very badly.  For the crypto industry, smaller coins are a lot more profitable than bitcoin.  As such, smaller coins have been aggressively promoted.  In smaller coins, promoters have already made their money – it is the investors who are left holding the bag.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.  Our proprietary 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.