By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
AI Driven Disconnect Widens
Please click here for a chart of 7-10 Year Treasury Bond ETF IEF.
Note the following:
- The chart shows that the bond ETF has fallen to the support zone.
- Bonds move inverse to the yield.
- The reason IEF has moved down is because yields have risen.
- This is an important chart because stocks compete with bonds. 10 year Treasury bond yield is the reference benchmark to compare with stocks.
- In yesterday’s Afternoon Capsule, we shared with you that FOMC minutes were hawkish. Please read yesterday’s Afternoon Capsule for details.
- ADP is the largest private payroll processor in the country. ADP uses its data to give a glimpse of the employment picture ahead of the official jobs report that will be released on Friday at 8:30am ET.
- ADP came at 497K vs. 245K consensus.
- ADP data is a blowout number, indicating a very strong jobs picture.
- Weekly jobless claims came at 248K vs. 250K consensus. This is a leading indicator and carries heavy weight in the proven adaptive ZYX Asset Allocation Model with inputs in ten categories. ZYX Asset Allocation Model has a long track record of calling both bull and bear markets correctly better than any other model. The secret is that this model automatically changes itself with market conditions. Most models on Wall Street are static — they work for a while and then stop working when market conditions change.
- When the AI frenzy started, it disconnected the magnificent seven stocks from interest rates. The magnificent seven are Apple (AAPL), Amazon (AMZN), Alphabet (GOOG, GOOGL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), Tesla (TSLA). The popular Nasdaq 100 ETF (QQQ) has risen mostly due to the rise in the magnificent seven stocks.
- The disconnect between rising interest rates shown on the chart and the magnificent seven continues to widen.
- Take a look at the chart when IEF was in the support zone the last time and then see where the magnificent seven stocks were at that time. The magnificent seven stocks were significantly lower at that time.
- In The Arora Report analysis, such a wide disconnect is not sustainable. Here is the key question for investors: Will interest rates fall or will the magnificent seven pull back and in the process cause a pullback in S&P 500 (SPX)?
- As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.
Momo Crowd And Smart Money In Stocks
The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) stocks in the early trade. Smart money is 🔒 stocks in the early trade.
Gold
Gold is pulling back on rising yields.
The momo crowd is 🔒 gold in the early trade. Smart money is 🔒 in the early trade.
For longer-term, please see gold and silver ratings.
Oil
Oil is pulling back on recession fears.
API crude oil inventories came at a draw of 4.382M barrels vs. a consensus of a draw of 1.8M barrels.
The momo crowd is 🔒 oil in the early trade. Smart money is 🔒 in the early trade.
For longer-term, please see oil ratings.
Bitcoin
Bitcoin is seeing 🔒 as BlackRock (BLK) pushes for approval of bitcoin ETF.
Markets
Our very, very short-term early stock market indicator is 🔒. This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.
Interest rates are ticking up, and bonds are ticking down.
The dollar is weaker.
Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.
Gold futures are at $1913, silver futures are at $23.00, and oil futures are at $71.65.
S&P 500 futures are trading at 4447 as of this writing. S&P 500 futures resistance levels are 4460, 4600. and 4713: support levels are 4400, 4318, and 4200.
DJIA futures are down 276 points.
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 holding 🔒 in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. 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.
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.
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Nigam Arora
Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.
Dr. Natasha Arora
Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.
