By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Nasdaq Could Fall
Please click here for a chart of Nasdaq 100 ETF (QQQ).
Note the following:
- The chart compares QQQ with 7-10 year Treasury Bond ETF IEF, and long duration ARK Innovation ETF ARKK.
- The chart shows that since the December low, IEF rose in January and now has pulled back close to its December low. IEF moves inverse to the 10-year Treasury yield. The 10-year Treasury yield has risen to 3.8840% as of this writing from the low of 3.3750% in January 2023.
- The 10-year Treasury yield is the benchmark as it is a major factor in determining price earning ratios.
- So far, earnings have been worse than expected, but stock bulls have taken comfort in that they have not been dire. Moreover, the momo crowd has focused only on the good parts of earnings and projections and ignored the bad parts.
- The chart shows that QQQ was about 14% lower in December when IEF was about the same level it is now.
- The situation is more dramatic for junk stocks. We previously wrote:
Many junk stocks are up 70% – 250% in 2023.
- The chart shows that ARKK is up about 30% from the December low. IEF has now pulled back close to the December low, but ARKK continues to levitate on momo crowd exuberance.
- Fed fund futures are now expecting a high rate of 5.32% in August 2023.
- With the latest rise in yields, the bond market is now aligned with the Fed.
- Due to the momo crowd’s exuberance, the stock market continues to be out of sync with the Fed and the bond market.
Fifth Blow To The Head Was Too Much
There were four pieces of data that were blows to momo gurus’ thesis. Here were the four blows:
- Strong jobs report
- Hotter CPI
- Hotter PPI
- Fed’s Mester saying that she wanted a 50 basis point hike in the last meeting when the Fed raised interest rates only by 25 basis points.
We have written about these four points. In yesterday’s Morning Capsule, we shared with you:
The Fed’s Mester is saying that the inflation risk is to the upside. Mester said that she supported a 50 basis point rate hike during the last meeting. The Fed increased interest rates by 25 basis points.
The momo crowd ignored all of the four blows to its thesis, then came the fifth blow to the head from St. Louis Fed President Bullard in the mid-afternoon yesterday. Bullard said that he could not rule out a 50 basis point hike at the March meeting.
The fifth blow was simply too much and caused the momo crowd to start selling going into the close yesterday.
Momo crowd selling continues this morning in the early trade.
Lately, the favorite technique of the momo crowd has been to buy the opening low, run up the stock market during the day, and boast that every day buying the opening low is easy money. Prudent investors should observe if the same pattern repeats itself today or if it has finally broken after the fifth blow.
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 is coming under pressure because the dollar is rising. Gold is priced in dollars. Therefore, when the dollar rises, the price of gold goes down.
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.
The momo crowd is 🔒 oil in the early trade. Smart money is 🔒 in the early trade.
For longer-term, please see oil ratings.
Bitcoin gurus are trying their best to get mom and pop excited by saying $30,000 is around the corner. Bitcoin continues to levitate. Bitcoin is trading at $23,817 as of this writing.
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 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 $1837, silver futures are at $21.31, and oil futures are at $76.23.
S&P 500 futures are trading at 4078 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 down 119 points.
Protection Bands 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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