Business • Markets • News

Stock Market Ignoring Tariff Pull Forward But Prudent Investors Should Not

5 hours ago

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

Tariff Pull Forward

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 the stock market previously touched the low band of support zone 3 on April 7.
  • The chart shows that the stock market quickly rebounded to the low band of resistance zone 2.
  • The chart shows that after the first quick rebound, the stock market pulled back to support zone 2 and then started rallying again.
  • The chart shows that the stock market is now knocking at the door of the low band of resistance zone 2 again.
  • Stock market bulls are predicting that the market will move rapidly towards resistance zone 3.  Stock market bears are predicting the market is likely to pull back to support zone 2.
  • In our analysis, both of the foregoing scenarios have a fair probability.  Further, the near term direction will be determined by earnings.  In the longer term, the stock market is ignoring tariff pull forward.
  • In our analysis, there has been significant positive economic activity from tariff pull forward.  
    • Consumers bought ahead of tariffs going into effect.  
    • Businesses bought ahead of tariffs to build inventories.  
    • Importers imported to build inventories ahead of tariffs.  
  • We previously shared with you that there is over 70% probability that earnings this season will be better than consensus.  One of the reasons is tariff pull forward. 
  • Here is the question prudent investors need to ask: What will be the impact of tariff pull forward on economic activity now and earnings for the next earnings season? 
  • The answer to the foregoing question is that the impact of the tariff pull forward will be negative
  • Sentiment remains positive due to expectations that President Trump will announce several trade deals soon.
  • The stock market is very optimistic about a deal with China.  However, in our analysis, investors should differentiate between a potential positive headline and a substantive deal.  Even if there is a positive headline, the probability of a substantive deal is nowhere near what the stock market expects.  
    • Indications coming out of China are that negotiations will not be easy. 
    • President Xi of China is attempting to turn several countries against the U.S. 
  • Treasury Secretary Bessent is focused on lowering the 10 year Treasury yield.  This focus is understandable considering the heavy borrowing needs of the U.S.  The Treasury has just announced that details of borrowings:
    • Q1 $369B
    • Q2 $514B
    • Q3 $554B
  • JOLTS job openings and consumer confidence was released at 10am ET.

Canada

Not long ago when Justin Trudeau announced his resignation, liberals were not in a strong position.  In a dramatic turn around, liberals led by Mark Carney won the election.  Liberals were helped by the anti-Trump sentiment. Conservative leader Pierre Poilievre lost his own seat.

From investors’ perspective, there are two key points:

  • Carney’s victory is narrow.
  • Under Carney, Canada is expected to be the leader of the anti-Trump mantle in the West.  

Magnificent Seven Money Flows

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

In the early trade, money flows are neutral in Apple Inc (AAPL), Alphabet Inc Class C (GOOG), Meta Platforms Inc (META), Microsoft Corp (MSFT), and Tesla Inc (TSLA).

In the early trade, money flows are negative in NVIDIA Corp (NVDA).

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).

Bitcoin

Bitcoin BTC/USD 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.