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Bond Reaction
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 that after breaking above the breakout line, the stock market is pulling back. Zone 1 (resistance) shown on the chart is a magnet for stock market bulls. RSI on the chart shows the stock market is overbought. Overbought markets are susceptible to a pullback. The momo crowd continues to buy every tiny dip on hopium that the stock market is going to new highs in a matter of days. Yesterday after hours, stock futures dipped on a report that Israel may be getting ready to attack Iran's nuclear facilities. The momo crowd aggressively bought the dip. Earlier this morning, stock futures dipped on rising bond yields. Once again, the momo crowd aggressively bought the dip. As of this writing, the yield on 10 year Treasuries has risen above the psychologically important level of 4.5% - it is trading at 4.535%. The yield on 30 year Treasuries has risen above the psychologically important level of 5% - it is trading at 5.027% as of this writing. Rising yields are getting in the way of the stock market rally. The U.S. Treasury will sell $16B in 20 year bonds today. We will be carefully watching as the results may be market moving. Investors gain an edge when they learn how to interpret Treasury auctions - in view of the rising national debt and deficit this is important. Why are Treasury yields rising? The bond market tends to be smarter than the stock market as the stock market is dominated by the momo crowd. The bond market is staring at President Trump's "big beautiful" tax bill and getting concerned that the bill will raise the deficit and national debt. In contrast, the stock market momo crowd is looking at the tax bill and aggressively buying stocks as they are excited about tax cuts. Among notable earnings, earnings from retailer Target Corp (TGT) are below consensus, but earnings from home improvement retailer Lowe's Companies Inc (LOW) are above consensus. Investors should ignore DJIA this morning as the drop in DJIA is in part due to the drop in UnitedHealth Group Inc (UNH). UnitedHealth is the largest health insurer in the country. UNH stock is dropping on a downgrade and allegations that UnitedHealth secretly paid kickbacks to nursing homes. On Capitol Hill, negotiations are continuing on the tax bill. The outcome may be market moving. There are differences among GOP lawmakers on details of a tax package. According to the latest analysis by the nonpartisan Congressional Budget Office, the bill will increase resources by 4% for the top 10% of U.S. households and decrease resources by 2% for the bottom 10% of U.S. households. Magnificent Seven Money Flows
In the early trade, money flows are positive in Alphabet Inc Class C (GOOG) and Tesla Inc (TSLA).
In the early trade, money flows are negative in Amazon.com, Inc. (AMZN), NVIDIA Corp (NVDA), Microsoft Corp (MSFT), Meta Platforms Inc ( META), and Apple Inc (AAPL).
In the early trade, money flows are negative 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).
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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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