STOCK MARKET BUYING AS CLASSIC RATE CUT SIGNAL TRIGGERED

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By Nigam Arora & Dr. Natasha Arora

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

Classic Rate Cut Signal Triggered

Please click here for a chart of 2-year Treasury ETF (UTWO).

Note the following:

  • The chart shows a sharp breakdown in 2-year Treasuries prior to the start of the banking crisis.
  • The chart shows a sharp move up, including a breakout in 2-year Treasuries due to the banking crisis.
  • The price of Treasuries moves inverse to interest rates.  The yield on 2-year Treasuries moved from a high of 5.066% on March 8 to 3.777% on March 24.  The yield is rising this morning to 3.982% as of this writing.
  • A move in 2-year Treasuries often precedes a move in the Fed funds rate.
  • The differential between Fed funds rate at the year-end as projected by the Fed and what the market believes reached an unusually high gap of 1.145% on Friday.
    • Either the Fed is wrong or the market is wrong.
  • The foregoing events have triggered a classic rate cut signal.  The conventional wisdom at present is to buy stocks on this rate-cut signal.
  • For over a year, when the stock market became too optimistic compared to the Fed, The Arora Report call has consistently been that the stock market was wrong.  Every single one of those calls has proven spot on.
  • Market conditions have now changed.  Our call is no longer that there is a high probability that the stock market is wrong.
  • As the stock market is focused on buying stocks on this rate cut signal, the market is ignoring the fact that the banking crisis is tightening financial conditions.  Here are the key points:
    • Over 50% of the loans in key sectors of the economy are provided by banks with assets under $250B.
    • Stricter regulations are coming to these banks.
    • These banks have tightened lending standards, making it more difficult to get loans.
    • Regulatory supervisors of such banks have been humiliated.  Every time regulators are humiliated, they become stricter in supervision.
    • The Arora Report call is that there is less than 40% probability that this rate cut signal to buy stocks is correct.
    • Due to the high importance of this signal, a podcast titled ”Should You Buy Stocks On The Classic Rate Cut Signal?” that gives next-level information has been recorded and is in post-production.
  • The tightening of financial conditions has increased the probability of a recession.  Wall Street’s earnings estimates are too high.  We started sharing with you our call that Wall Street’s earnings estimates were too high when they were at $250.  That call has proven spot on.  Wall Street’s earnings estimates are now about $206.
  • Most of Silicon Valley Bank (SIVB) has been bought out by First Citizens Bank (FCNCA).  The bank is buying certain loans at a discount of over $16B from FDIC. FDIC will still have about $90B of loans in receivership.
    • FCNCA stock is jumping 55% as of this writing in the premarket.
  • We have previously shared with you that investors should keep track of three western regional banks.
    • FRC is up 30% as of this writing in the premarket.
    • WAL is up 6.5% as of this writing in the premarket.
    • PACW is up 9.6% as of this writing in the premarket.
  • The government is finding ways to give First Republic more time to find a buyer.
  • The actionable item is to develop your knowledge about the rate cut buy signal and be ready to make a change.  At this time, there is no change in the protection band.
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Window Dressing

The end of the quarter is approaching.  Expect many money managers to engage in window dressing.  In window dressing, these money managers buy the stocks that have been winners this quarter and sell the stocks that have been losers this quarter to show their clients in their quarter-end report that they are holding winning stocks and not losing stocks.

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

Bitcoin is range bound.

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 range bound.

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 $1951, silver futures are at $23.05, and oil futures are at $70.49.

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S&P 500 futures are trading at 4025  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 217 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.

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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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