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Deploy Cash And Reduce Hedges, Peak Tariff Uncertainty Is Over But Peak Economic Uncertainty Is Not

5 hours ago

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

Deploy Cash And Reduce Hedges

The change is triggered by the prospect of China tariffs being reduced to 10%.

Great Deal For China

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 a big rally in the stock market in the early trade on the news of the China deal.
  • The chart shows the stock market has broken through zone 2, which was previously a resistance zone.  Zone 2 is now a support zone.
  • The chart shows the stock market jumped to the breakout line.  The stock market is likely to experience some resistance at the breakout line, but this resistance is very weak.
  • The chart shows the stock market has crossed back above the 200 day moving average.  This will bring aggressive buying from the legion of investors who believe the myth of the 200 day moving average.
  • RSI on the chart shows that the stock market is barely overbought and has room to run to the upside.
  • Here are the key points about the China deal:
    • Total tariffs will be reduced from 145% to 30%.
    • Prudent investors should note that as recently as last week, President Trump was floating the idea of reducing China tariffs to 80%.
    • Prudent investors should also note that on the campaign trail, President Trump promised 60% tariffs on Chinese goods.
    • 30% tariffs are made up for 10% reciprocal tariffs and 20% fentanyl tariffs.
    • Treasury Secretary Scott Bessent says that 20% fentanyl tariffs could be removed if China acts.
    • The deal is for 90 days.  Parties will negotiate further.
    • The summary of the foregoing is that China tariffs are likely to be only 10% compared to President Trump’s campaign trail promise of 60%.
  • In our analysis, with only 10% tariffs on China, President Trump will not meet any of his following stated goals:
    • Eliminating the trade deficit
    • Raising trillions of dollars in tariffs to offset income tax
    • Bringing significant manufacturing to the U.S. 
  • Further, in our analysis, President Trump making a U-turn is not good for the U.S. in the very long term.  However, in the short term, this is good for the U.S. economy and stock market.  
  • Peak tariff uncertainty is over, but peak economic uncertainty is not.  
  • Prudent investors should note that yields are rising again with 10 year Treasuries reaching 4.46%. 
  • In our analysis, if this deal holds, it is the greatest deal China could have possibly expected.  From an investment perspective, there will be merit in due course to buy Chinese stocks.  Chinese stocks are very inexpensive.  Chinese stocks trade at a trailing PE of 14.34 and forward PE of 13.05.  As a reference, U.S. stocks trade at a trailing PE of 24.17 and forward PE of 20.74.  You will see signals in due course. 
  • Adding to the positive sentiment is that neighbors India and Pakistan have agreed to a ceasefire.  The stock market in India is up 3.7%.  There is merit to starting or adding to India positions on dips.  As full disclosure, there is India focused fund Fairfax India Holdings Corp (FFXDF) in our ZYX Buy Core Model Portfolio.  There is also a trade around position on FFXDF.  As full disclosure, India ETFs WisdomTree India Earnings Fund (EPI), VanEck India Growth Leaders ETF (GLIN), and iShares MSCI India Small-Cap ETF (SMIN) are in ZYX Emerging. 
  • Pharmaceutical stocks such as Eli Lilly And Co (LLY), Novo Nordisk A/S (NVO), Merck & Co Inc (MRK), Pfizer Inc (PFE), and Bristol-Myers Squibb Co (BMY) are lower on President Trump’s plan to lower drug prices.  As full disclosure, there is a short position in NVO in ZYX Short.

Magnificent Seven Money Flows

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

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).

Gold

After the India Pakistan ceasefire and China trade deal, there is less need for safe havens such as gold.  

Oil

Due to China tariffs being dropped to a very low level, global growth is likely to be higher than anticipated as late as Friday.  Higher growth means more demand for oil.  

Bitcoin

Bitcoin is seeing buying but there is some disappointment that whales did not take advantage of low liquidity over the weekend to run bitcoin over $108K.

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.