Rate Cut Fever Grips The Market; The Magnetic Pull Of Gold At $4000

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

Gold Magnet

Please click here for an enlarged chart of SPDR Gold Trust GLD.

Note the following:

• The chart shows that the recent breakout above zone 2 (support) was successful.
• The chart shows that gold is now in zone 1 (resistance).
• Sentiment on gold is now extremely positive.  Momo gurus with no prior record on gold are now jumping in pretending to be gold experts and urging their followers to aggressively buy gold.  Historically, this is a common behavior of momo gurus.  In 2011, after missing the gold rally, from $600 to $1800 momo gurus also jumped in pretending to be gold experts urging their followers to buy gold.  Gold topped shortly afterwards.
• For traders, gold at $4000 has become a magnet.  As a reference, gold futures are trading at $3681 as of this writing.
• Previously, our call was to back up the truck and buy gold when it was around $600.  When gold reached $1904 in 2011, our call was to sell half of the gold position and put a stop on the other half at $1857.  Gold topped at $1911 only hours after our call and subsequently fell close to $1000.
• In our analysis, there are two reasons for the latest buying in gold:
  • Momo stock gurus have now discovered gold.  
  • Rate cut fever
• In our analysis, a dichotomy has developed: 1) investors are buying gold believing inflation, deficit spending, and high debt are serious problems; 2) investors are buying stocks believing inflation, deficit spending, and high debt are not a problem.  
• Yesterday we wrote:

Initial jobless claims came at 263K vs. 240K consensus.  Initial jobless claims have not been this high since the fall of 2021.

• After the jobless claims data was released, euphoria broke out amongst stock market investors, due to higher pressure on the Fed to cut interest rates.  The momo crowd is addicted to low interest rates.
• When the jobless claims data was released, at the same time, Consumer Price Index (CPI) data was released.  CPI data showed inflation was running hotter than expected and still around 3%, compared to the Fed's target of 2%. In a rational world, the CPI data should have caused the stock market to drop significantly.  However, the stock market is almost never rational.  The stock market completely ignored inflation.
• The sentiment in the stock market is shifting from extreme positive to euphoria.
• Microsoft Corp (MSFT) is rumored to take a $100B equity stake in ChatGPT creator OpenAI.  Interestingly, OpenAI is also believed to have signed a $300B infrastructure contract with Oracle Corp (ORCL) and not with Microsoft.  In our analysis, the stock market is perceiving this development as positive for both Microsoft and Oracle.  Further, the stock market is perceiving this development as positive for the entire AI trade.  This Microsoft investment answers, in part, the question as to where OpenAI will get the funds to pay Oracle.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Nvidia (NVDA), Microsoft (MSFT), and Tesla (TSLA).

In the early trade, money flows are neutral in Amazon (AMZN), Alphabet (GOOG), and Meta (META).

In the early trade, money flows are negative in Apple (AAPL).

In the early trade, money flows are positive in S&P 500 ETF (SPY) and Nasdaq 100 ETF (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 seeing buying.

What To Do Now

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.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.