Bonds Defy Expectations, Earnings Season Will Be A Tell For AI

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

Bonds Defy Expectations

Please click here for an enlarged chart of 20+ year Treasury bond ETF (NASDAQ:TLT).

Note the following:

• Long bonds are defying expectations in the market.
• The chart shows when the Fed cut interest rates by 50 bps. At that time, TLT had shown a technical breakout. The expectations were for TLT to go higher.
• The chart shows the contrary Arora call that TLT would likely go down.
• We recently wrote:

In The Arora Report analysis, if it was not for the Middle East conflict escalation, TLT would have already fallen into the top support zone.

• The chart shows that The Arora Report call has been spot on.  TLT has now hit the top band of the support zone.
• What happens next to long bonds will come down to the election. The prevailing consensus is that there will be a divided government. A divided government will be good for both stock and bond markets. If one party sweeps, there will be a high probability of TLT hitting the lower support zone.
• Bonds offer competition to stocks. Rising yields also lower PEs. For the time being, the stock market is drunk on the momentum generated by the 50 bps cut instead of a 25 bps cut.  When the momentum wanes, the stock market will start paying attention to rising yields.
• Prudent investors should note that so far the data has not been supportive of the Fed's decision to cut interest rates by 50 bps.
• Earnings season is in full swing. Earnings season will be a tell for AI. Undoubtedly, almost every company will hype AI.  In the prior quarters, the stock of almost every company that mentioned AI ran up. Here is the key question: Will the stocks run again just on the mention of AI or will the market look for hard data regarding AI?
• After the weekend pump, the momo crowd buying in stocks in the early trade is aggressive.
• Traders are fixated on S&P 6000 as the magnet.

China

In a Saturday briefing, China did not offer new economic stimulus China also did not provide specific numbers as most investors had expected.

• Foreign investors are disappointed and selling Chinese stocks.
• Local investors are satisfied and buying Chinese stocks.

Magnificent Seven Money Flows

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), NVIDIA Corp (NASDAQ:NVDA), and Tesla Inc (NASDAQ:TSLA).

In the early trade, money flows are positive in SPDR S&P 500 ETF Trust (NYSE: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 (NYSE:GLD).  The most popular ETF for silver is iShares Silver Trust (NYSE:SLV).  The most popular ETF for oil is United States Oil ETF (NYSE:USO).

Bitcoin

Bitcoin (CRYPTO: BTC) is seeing buying for two reasons:

• Trump has moved up in the polls. Trump is considered more bitcoin friendly.
• Foreign speculators who are selling Chinese stocks are putting the money in bitcoin.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

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.