Deploy Cash

Our model has given a signal to deploy cash. The trigger for this move is cooler than expected Consumer Price Index (CPI). In our protection band, cash is being reduced by 3%.

Cooler CPI

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

Note the following:

The chart shows buying in the stock market after the release of CPI data.
The chart shows that during the recent pullback the stock market did not even touch the top band of zone 1 (support) before bouncing. This indicates a stock market that wants to go higher.
The chart shows the magnet for stock market traders.
After cooler than expected CPI data, the probability of a move to the magnet has increased. Here are the details:
- Headline CPI came at 0.3% vs. 0.4% consensus.
- Core CPI came at 0.2% vs. 0.3% consensus.
In our analysis, here are the probabilities of future rate cuts after CPI data:
- 99% in October
- 90% in December
President Trump is traveling to the APEC Summit in Korea. He is expected to meet with China’s President Xi on Thursday next week.
President Trump is optimistic about reaching a deal with China. In addition to the overall trade, of special interest are soybeans and rare earth minerals.
President Trump is expected to sign trade deals with 12 companies.
The FOMC meeting will start on Tuesday next week. The rate decision will be announced on Wednesday.
In our analysis, here are the bullish factors investors should be looking at:
- The pattern of the momo crowd is to buy ahead of the Fed rate decision. The probability is high that the pattern will repeat.
- Expect President Trump to continue making positive statements about the upcoming meeting with President Xi.
- President Trump has an incentive to spin the results of the meeting with President Xi as positive even if China stands firm.
- The momo crowd may try to front run the Trump Xi meeting.
- Blind money will flow into the stock market on the first two days of November.
If the stock market starts moving higher, expect year end chase by money managers.
It is important for investors to think both in strategic and tactical terms. All of the foregoing positives are tactical in nature.
From a strategic point of view, substantial risks remain. These risks include the following:
- The Fed's inflation target is 2%. 3% is significantly higher than 2%.
- Inflation can easily resurge.
- Valuations are very high.
- At some point, there will be over investment in AI.
- China is not going to give up its quest to replace the U.S. as the world's superpower. In substance, any agreement with China that is cast as positive is likely, in reality, to be hollow.
- There is no solution in sight to $1.8T in budget deficit and $38T in national debt.

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks. To get ahead and get an edge, investors need to pay attention to early money flows in the Mag 7 stocks on a daily basis.

In the early trade, money flows are positive in Apple Inc (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc Class C (NASDAQ:GOOG), Meta Platforms Inc (NASDAQ:META), Microsoft Corp (NASDAQ:MSFT), and NVIDIA Corp (NASDAQ:NVDA).

In the early trade, money flows are negative in Tesla Inc (NASDAQ:TSLA).

In the early trade, money flows are positive in S&P 500 ETF (SPY) and Invesco QQQ Trust Series 1 (NASDAQ: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

JPMorgan Chase & Co (NYSE:JPM) is going to accept Bitcoin (CRYPTO: BTC) and Ether as collateral from institutional clients.

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.

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.

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.