Momo Buys On Fed Hopium But Prudent Investors Wait For Dot Plot, Trump Gambit Increases Risk

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

Prudent Investors Waiting For Dot Plot

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 consolidated below zone 1 (resistance).
• RSI on the chart shows the stock market is neither overbought nor oversold.
• The momo crowd continues to aggressively buy stocks on their conviction that the stock market is about to break above zone 1.
• In President Trump's latest gambit, he demanded "unconditional surrender" from Iran.  Iran's Supreme Leader Ali Khamenei rejected President Trump's demand saying "imposed war" is not acceptable, nor is "peace" and that there will be "serious irreparable consequences" if the U.S. strikes Iran.
  • From President Trump's posts, it appears that he is moving towards a U.S. strike on Iran's nuclear facilities.
• In our analysis, if the U.S. strikes Iran and the Iranian regime does not surrender and does not collapse, the Iranian regime could block the Strait of Hormuz, strike U.S. bases, and take the entire region down with them.  Such a scenario increases significant risk for investors.  For this reason, it is important for prudent investors to pay attention to the our Protection Band.
• In our analysis, if historical precedence holds true, the momo crowd will initially aggressively buy stocks if the U.S. strikes Fordow with bunker busting bombs to destroy uranium enrichment facilities.
• We are not military experts but here is an important piece of information from military experts that the media is not talking about.  Prudent investors should be aware that the most potent American bomb GBU-57 is designed to penetrate 200 feet into the mountain and then explode – the uranium enrichment facility at Fordow is believed to be 300 feet below the mountain.   Even if a GBU-57 bomb does not reach the facility, it may destroy access to the facility and associated infrastructure such as HVAC.  There is speculation that Iranians designed the facility to survive this scenario. Prudent investors should note that it appears the probability of success is not 100%.  There is increased risk to investors if the U.S. strikes and is not successful.
• The Fed will announce its interest rate decision today at 2pm ET, followed by Fed Chair Powell's press conference at 2:30pm ET.
  • The consensus is the Fed will leave interest rates unchanged.
  • The momo crowd's historical pattern is to buy stocks before the Fed decision on hopium that the Fed will cut interest rates.  Today is shaping up to be no different – the momo crowd is buying stocks ahead of the Fed
  • In contrast to the momo crowd, prudent investors are waiting for the dot plot.  The dot plot will give clues for future rate cuts.  The last dot plot from March implied two rate cuts in 2025.  
• Initial jobless claims came at 245K vs. 253K consensus.  This removes the fear of a quick drop in the employment picture.

Housing Starts

The data shows that the housing market is weakening.  Here are the details:

• Housing starts came at 1.256M vs. 1.356M consensus.
• Building permits came at 1.393M vs. 1.411M consensus.

The foregoing data is in accordance with the conference call from Lennar Corp Class A (LEN) earnings.  Lennar is a major home builder. Upon release of Lennar earnings, the momo crowd aggressively bought LEN stock, running it up to $114.21.  Smart money sold the rally on lower guidance.  LEN stock fell and closed at $104.61. 

Magnificent Seven Money Flows

In the early trade, money flows are positive in Apple Inc (AAPL), Meta Platforms Inc (META), NVIDIA Corp (NVDA), and Tesla Inc (TSLA).

In the early trade, money flows are neutral in Amazon.com, Inc. (AMZN), Microsoft Corp (MSFT), and Alphabet Inc Class C (GOOG).

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).

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.