Caught Off Guard, Institutions Chase Stock Market Rally

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

Market Positioning

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 has moved above the breakout line.
  • For stock market bulls, zone 1 (resistance) shown on the chart is the magnet.
  • Momo gurus are claiming that they know the stock market is going to go above zone 1 to new highs in a matter of days.
  • Bears are throwing in the towel as they never expected President Trump to give China everything it wanted with very little in return other than talk.  In our analysis, China has a great track record of appeasing American presidents with talk without following through with actions.    
  • In January and February when our calls were to take partial profits and raise hedges, including hedges to protect individual strategic positions with very large unrealized gains, institutions were aggressively buying. 
  • When the stock market fell in early April, as shown on the chart, many institutions were holding very low cash.  Institutions were over invested.
  • The chart shows when our report was giving buy signals in early April near the lows.   At that time, institutions were selling because they were very over invested.  After the selling, institutions became under invested, which they thought was prudent at the time due to the trade war with China.
  • As the stock market started moving up from the lows, institutions dismissed the rise.  Institutions had good reason to dismiss the rise because they were looking at President Trump's campaign promise of 60% tariffs on China.   Based on comments from the Trump administration, institutions were convinced that the biggest concession President Trump would give to China would be to reduce tariffs to 60% – 80% from 145%.  Under this economic scenario, it made no sense to buy stocks at market lows.
  • Institutions were caught off guard when it was revealed this Monday that tariffs on China would be only 10% after fentanyl tariffs are removed.  Institutions did sophisticated analysis of many scenarios but never dreamed the U.S. would give China everything China wanted in exchange for very little.
  • Normally, after the big rally on Monday, there would have been some give back yesterday.  However, instead of giveback, the market rallied further, and institutions were chasing the market since they are under invested.
  • Most institutions do not behave like the momo crowd.  Expect institutions to aggressively buy the dips unless the data changes.
  • The momo crowd is back to their normal behavior.  The momo crowd is extremely aggressively buying speculative stocks and call options on indexes and their favorite stocks.
  • As the market rises, our tentative plan is to start taking profits by scaling out of tactical positions that were started near the market lows in April.
  • To consistently beat the market, investors need to look ahead.  A vast majority of investors do not look ahead.  They suffer from recency bias.  A vast majority of investors invest based on what has happened over the last ten days.  
  • In our analysis, as we look ahead, the data shows that peak trade tariff uncertainty is behind us but peak economic uncertainty is not.  We previously shared with you, in our analysis, there is a 60% probability of stagflation.  
  • Producer Price Index (PPI), retail sales, and initial jobless claims will be released tomorrow at 8:30am ET and may be market moving.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Alphabet Inc Class C (GOOG), Meta Platforms Inc (META), NVIDIA Corp (NVDA), and Tesla Inc (TSLA).

In the early trade, money flows are neutral in Amazon.com, Inc. (AMZN).

In the early trade, money flows are negative in Apple Inc (AAPL) and Microsoft Corp (MSFT).

In the early trade, money flows are positive 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).

Gold

Money is flowing out of gold as investors no longer feel the need for protection.  The momo crowd is panicking and selling gold.  Our report gave a signal to take partial profits on gold near the highs.  

Oil

API crude inventories came at a build of 4.287M barrels vs. a consensus of a draw of 2.4M barrels.

Bitcoin

Bitcoin is range bound.

Arora 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.

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