To gain an edge, this is what you need to know today.
Lower Probability Of Stagflation And Recession
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 did not break above the breakout line on yesterday’s rally.
- The chart shows volume yesterday was not heavy, indicating that there is not high conviction in the jump.
- Stock market bulls are expecting the market to quickly reach zone 1 (resistance) shown on the chart.
- Stock market bears are scratching their heads trying to figure out why President Trump gave China everything it wanted, leaving the U.S with almost nothing in exchange. Bulls respond by saying President Trump has managed to get China to agree to open up to American goods by removing non-monetary barriers.
- In our analysis, prudent investors need to remember that China has been promising to open up ever since President Nixon. China has always talked a good game about opening up, but in reality, it has always maintained restrictions.
- The chart shows the stock market remains below the breakout line after the Consumer Price Index (CPI) came cooler than expected. Here are the details:
- Headline CPI came at 0.2% vs. 0.3% consensus.
- Core CPI came at 0.2% vs. 0.3% consensus.
- In our analysis the probabilities of stagflation and recession have decreased. The reason is the great deal China secured on tariffs. On the campaign trail, President Trump had promised 60% tariffs on Chinese goods. Once fentanyl tariffs are removed tariffs on Chinese goods will be only 10%. As a reference, tariffs on the U.S.’s best ally, the U.K., are also 10%. The U.S. runs a trade surplus with the U.K. and a massive trade deficit with China.
- According to our analysis, the probability of stagflation is now 60%, down from 70% prior.
- According to our analysis, the probability of a recession is now 35%, down from 40% prior.
- Treasury Secretary Scott Bessent says the deal with the E.U. will be “a bit slower,” but he is optimistic about trade deals with Asian countries.
- Ignore the Dow Jones Industrial Average (DJIA) this morning – the drop in DJIA is due to UnitedHealth Group Inc UNH suspending guidance.
Magnificent Seven Money Flows
In the early trade, money flows are positive in Amazon.com, Inc. (AMZN), Alphabet Inc Class C (GOOG), Meta Platforms Inc (META), NVIDIA Corp (NVDA), and Tesla Inc (TSLA).
In the early trade, money flows are neutral in Apple Inc (AAPL).
In the early trade, money flows are negative in Microsoft Corp (MSFT).
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 seeing buying.
The crypto exchange company Coinbase Global Inc COIN is being added to the S&P 500. COIN will replace Discover Financial Services DFS on May 19. COIN is up about 11% as of this writing in the premarket.
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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