HERE IS WHAT INVESTORS ARE DOING TO PROTECT THEMSELVES AGAINST U.S. DEBT DEFAULT

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By Nigam Arora & Dr. Natasha Arora

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

Protecting Against Default

Please click here for a chart of 20-year Treasury Bond ETF (TLT).

Note the following:

  • It may seem oxymoronic but big institutional investors are buying long dated Treasury bonds to protect themselves against a potential U.S. debt default.  The reason long dated Treasury bonds are being bought is they went up during 2011 debt ceiling negotiations.  In 2011, the U.S. credit rating was downgraded.
  • The presumption is that if debt ceiling negotiations break down, long bonds will move higher.  As a result, TLT will break above the resistance zone shown on the chart.
  • The chart shows the trendline and the big drop in TLT due to the Fed rapidly raising interest rates.
  • Large investors are also buying gold to protect themselves.
    • Investors buying gold here need to be concerned that silver was hit hard yesterday due to selling based on inflation data from China.  As a full disclosure, The Arora Report had given a signal to take partial profits in silver ETF SLV prior to the drop.
    • There are times when gold leads silver and then there are times when silver leads gold.
    • So far this year, gold has been leading.
    • It is worth watching to see if silver now starts leading.
  • The debt ceiling meeting between President Biden and Speaker McCarthy has been postponed.  This is being seen as a sign of progress. The reason it is being seen as a signal of progress is that it is being interpreted as a sign of progress in lower level talks.

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 hoping for a short squeeze.  Remember, it is Friday, and short squeezes often occur on Fridays.  Smart money is inactive in the early trade.

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Gold

The momo crowd is 🔒 gold, but 🔒 silver, in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see gold and silver ratings.

Oil

The momo crowd is 🔒 in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin has fallen below $27,000.  Crypto bulls are disappointed that the calls from crypto gurus that bitcoin would go to $50,000 and higher in the event of a banking crisis have so far proven wrong.

Markets

Our very, very short-term early stock market indicator is neutral but expect the market to open 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 are ticking up, and bonds are ticking down.

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 $2016, silver futures are at $24.12, and oil futures are at $71.31.

S&P 500 futures are trading at  4157 as of this writing.  S&P 500 futures resistance levels are 4200, 4318, and 4400: support levels are 4000, 3950, and 3860.

DJIA futures are up 99 points.

Protection Band And What To Do Now

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

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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

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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