By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Hedge Funds Win
Please click here for a chart of 20+ Year Treasury Bond ETF TLT.
Note the following:
- The chart shows that the long bond ETF has fallen to the top band of the support zone.
- Bonds trade inverse to the yield.
- We have been sharing with you in the Capsules that yields at the long end are rising.
- Unless you have been under a rock, you know that over the last few months there has been a chorus of asset allocators in the media singing a song of buying long term bonds. Their thesis has been that 3.5% – 4% yield on a 30 year bond was attractive, and investors needed to lock in that yield by buying long term bonds. They themselves have been buying long term bonds for their clients.
- In contrast to the asset allocators, hedge funds have been aggressively short selling long bonds. As of this writing, the yield on 30 year Treasuries has risen to 4.397%. In absolute terms, the difference between 3.7% and 4.39% may not seem like much, but when you look at it for a 30 year duration, it makes a big difference. This is reflected in the chart of TLT.
- At least temporarily, hedge funds have won the battle at the expense of asset allocators and their clients.
- The immediate reason for rising yields at the long end has been that the momo crowd has all of a sudden discovered that the U.S. has a serious national debt problem.
- At The Arora Report, we got our members out of long bonds a long time ago. Since then signals have been given as tactical trades to buy TLT a few times. You may recall that our strategic position was to buy leveraged inverse long bond ETF TBT. This position was highly profitable. TBT went from a low of $15.52 in November 2021 to a high of $39.33 in October 2022. As a comparison TBT is trading at $35.52 as of this writing. The Arora Report call for the fixed income portion of the portfolio has been to keep it in short term Treasury bills.
- For those who insist on a 60/40 portfolio and insist on buying bonds, so far, The Arora Report call has been spot on. Due to its importance, the following has been in every Morning Capsule for awhile:
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.
- Both hedge funds and asset allocators rushed into Chinese stocks and more importantly Chinese bonds not that long ago. Many Chinese bonds have recently been decimated. Chinese currency yuan has been weakening against the dollar. Chinese stocks have not done well. ZYX Emerging from The Arora Report has followed China continuously for 16 years. As both hedge funds and asset allocators were rushing into China, our ratings on China were suspended.
- Gloom is spreading in two areas.
- The potential housing crisis in China. The Chinese housing market is overbuilt and over leveraged. Evergrande, China’s property giant, filed for bankruptcy protection yesterday.
- Defaults are increasing in the Chinese shadow banking market.
- On the positive side, Applied Materials (AMAT) reported strong earnings. Applied Materials is one of the biggest manufacturers of semiconductor equipment. The demand for semiconductors is exploding due to artificial intelligence investments by companies across the world. Applied Materials is in the ZYX Buy Model Portfolio by The Arora Report, and AMAT is one of our favorite artificial intelligence stocks to buy. However, this is not a call to buy Applied Materials right here. The position in the portfolio is long from $16. AMAT traded as high as $143.62 after hours after release of good earnings. However, the stock is falling this morning in the premarket on the general malaise about tech stocks. Consider waiting for a dip in the buy zone to buy.
- On the negative side for stock market bulls, the momo crowd has finally discovered that yields are rising. They have stopped aggressively buying and are now selling.
- 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.
Magnificent Seven Money Flows
In the early trade, money flows are negative in Amazon (AMZN), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG), Meta (META), Tesla (TSLA), and Apple (AAPL).
In the early trade, money flows are negative in S&P 500 ETF SPY and 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.
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
There has been aggressive selling in bitcoin (BTC.USD). It has fallen close to $26,000 as of this writing.
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 down, and bonds are ticking up.
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 $1918, silver futures are at $22.68, and oil futures are at $79.13.
S&P 500 futures are trading at 4359 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 down 141 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.
