CLASSIC GAP DOWN IN BONDS IS NEGATIVE FOR STOCKS – SPOT ON LONG-TERM ARORA CALL

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By Nigam Arora & Dr. Natasha Arora

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

Classic Gap Down

Please click here for a chart of 20+ year Treasury bond ETF (TLT).

Note the following:

  • The chart shows a classic gap down in bonds.  This is negative for stocks.
  • The chart shows heavy volume on the gap down. This indicates conviction in selling bonds.
  • The chart shows bonds have fallen under the support/resistance zone.  This is negative.
  • The chart shows RSI divergence.  From a technical perspective, this signals a potential reversal in bonds.
  • Back in 2020, The Arora Report was the first to call that the long bull market in bonds was over and inflation would rise significantly.
  • Remember when The Arora Report made a call that the long bull market in bonds was over, the future was not known.  We had no company and the call went squarely against the conventional wisdom as well as the market trend of the last 38 years at that time.  In real life, a call does not get bolder than this.  Now, with the benefit of hindsight of three years since the call, it is crystal clear that the major call on bonds from The Arora Report was spot on.  
  • Earlier, the yield on 10-year Treasuries touched 4.5%.  10-year Treasuries are trading at 4.47% as of this writing.
  • The 10-year yield is used as a reference rate in determining the fair value of the stock market and also in determining the PE of individual stocks. Rising yields mean a lower fair value of the stock market.  From a valuation perspective, rising yields are especially harmful to the PEs of long duration stocks.  Long duration stocks include tech stocks and speculative stocks.
  • For those who want to take their understanding of the impact of rising yields on their portfolio to the next level, listen to the podcast titled “Be Careful With Popular Long Duration Stocks.”  The podcast is available in Arora Ambassador Club.
  • In the early trade, the momo crowd is aggressively buying stocks. They are not buying stocks because any analysis shows stock valuations have become attractive.  The momo crowd is simply buying because they have been trained to buy every tiny dip. 
  • Also helping the stock market in the early trade is aggressive buying in Apple (AAPL) stock.  AAPL is the largest stock and carries heavy weight in indexes.  AAPL stock is being bought on the launch of the iPhone 15 in retail stores.
  • As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.   Please scroll down to see the protection band.
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Bank Of Japan

Bank of Japan left its policy unchanged in line with the consensus.

Dreadful Data From France

The new data from France is dreadful, indicating that economic contraction is accelerating. 

  • Flash Manufacturing PMI came at 43.6 vs. 46.0 consensus.  A PMI less than 50 indicates economic contraction.  PMIs are leading indicators and carry heavy weight in our adaptive ZYX Asset Allocation Model with inputs in ten categories.  In plain English, adaptiveness means that the model changes itself with market conditions.  Please click here to see how this is achieved.  One of the reasons behind The Arora Report’s unrivaled performance in both bull and bear markets is the adaptiveness of the model.  Most models on Wall Street are static.  They work for a while and then stop working when market conditions change.
  • Flash Services PMI came at 43.9 vs. 46.0 consensus.

Overall in Europe, the data shows economic contraction, but it is not as bad as it is in France.

  • Eurozone flash Manufacturing PMI came at 43.4 vs. 44.0 consensus.
  • Flash services PMI came at 48.4 vs. 47.7 consensus.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Amazon (AMZN), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG), Meta (META), Tesla (TSLA), and Apple.

In the early trade, money flows are mixed in S&P 500 ETF SPY and positive in Nasdaq 100 ETF QQQ.

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 *** in the early trade.

Gold

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.

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Oil

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 (BTC.USD) is range bound.

Markets

Our very, very short-term early stock market indicator is ***.  Remember, it is a Friday, and short squeezes often happen on Fridays. If a short squeeze starts, it can take the market significantly higher.  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 and bonds are range bound.

The dollar is stronger.

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 $1945, silver futures are at $23.92, and oil futures are at $90.50.

S&P 500 futures are trading at 4387 as of this writing.  S&P 500 futures resistance levels are 4400, 4460, and 4600: support levels are 4318, 4200, and 4000.

DJIA futures are up 37 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.

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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.

To take a free 30-day trial to paid services to gain access to more opportunities, please click here.

This post was just published on ZYX Buy Change Alert.

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Nigam Arora

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

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.

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