By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Carry Trade Unwinds
Please click here for a chart of Japanese yen ETF (FXY).
Note the following:
- The chart shows the rapid rise in the yen.
- The chart shows that the rapid rise occurred after the Bank of Japan raised rates.
- ZYX Allocation by The Arora Report has a long position in yen ETF (FXY). We previously wrote that FXY would act as a hedge. That call has now proven spot on. FXY is rising while stocks are experiencing carnage.
- We have been sharing with you for a while to keep an eye on actions from the Bank of Japan as they may have a large impact on global stocks, including U.S. stocks.
- Last week we shared with you that the Bank of Japan raised rates and the carry trade was beginning to unwind. Funds have been borrowing money in yen and buying stocks across the globe. Most notably, funds have been using money borrowed in yen to buy AI related semiconductor stocks and the Magnificent Seven stocks. This is the reason the Magnificent Seven and other AI stocks are now seeing aggressive selling.
- There are several other factors entering into the mix to drive stocks lower.
- We have been sharing with you that sentiment had reached the extreme zone. We have also been sharing with you that when sentiment reaches the extreme, it is a contrary signal, i.e. a sell signal. Now we are seeing the aftermath of sentiment reaching the extreme.
- Warren Buffett has become defensive.
- Buffett’s company, Berkshire Hathaway (BRK.B), sold about half of its Apple (AAPL) position.
- BRK.B has reached a record $277B cash position on June 30 vs. $189B on March 31. This largely reflects Buffett selling about half of the AAPL position.
- This is especially very important because it was only back in May when Buffett said AAPL was a core holding like Coca-Cola (KO) and American Express (AXP). He has held KO and AXP for a very long time.
- Delay in Nvidia’s (NVDA) next generation Blackwell chip.
- Economic data is beginning to show slowing U.S. growth as we shared with you in Morning Capsules last week. Please read last week’s Morning Capsules for details. The most notable pieces of data are:
- ISM
- Jobless claims
- Jobs report
- The momo crowd is facing forced selling due to margin calls.
- Expect selling pressure to lift when early margin calls are done.
- Expect another couple of waves of margin calls during the day unless the market rallies substantially.
- Historically, the two times of heavy forced liquidation are around 10:30am ET and 1pm ET.
- In addition to the protection band that is protecting The Arora Report members’ portfolios, there are additional hedges in the form of gold and silver, as well as hedges on semiconductor stocks and all of the Magnificent Seven stocks with the exception of Tesla (TSLA). TSLA is not a portfolio holding.
- These additional hedges on semiconductor stocks and the Magnificent Seven stocks have now become profitable. Consider starting to book profits in small tranches on these hedges starting right now.
- The stock market is very oversold and can quickly bounce after forced selling is done.
- 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. The protection band is one of the large number of unique edges that are available to members of The Arora Report.
Magnificent Seven Money Flows
In the early trade, money flows are negative in Amazon (AMZN), NVDA, Microsoft (MSFT), Alphabet (GOOG), Meta (META), TSLA, and 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.
Note for new members: Smart money often sells into the strength generated by momo crowd buying and buys into the weakness generated by momo crowd selling. Over a long period of time, investors come out ahead by adopting smart money’s ways. The exception is in a raging bull market – for very short term trades, consider following the momo crowd and not smart money.
Gold
The momo crowd is like a *** 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 oil in the early trade. Smart money is *** in the early trade.
For longer-term, please see oil ratings.
Bitcoin
The Arora Report call that bitcoin (BTC.USD) is not a hedge is being proven right now. Bitcoin is being aggressively sold and is now approaching $50,000. Bitcoin whales unloaded bitcoin to unsuspecting retail investors last month.
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 weaker.
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 $2430, silver futures are at $27.19, and oil futures are at $72.74.
S&P 500 futures are trading at 5185 as of this writing. S&P 500 futures resistance levels are 5210, 5256, and 5400: support levels are 5020, 4918, and 4852.
DJIA futures are down 1077 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.
A protection band of 0% would be very bullish and would indicate full investment with 0% in cash. A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.
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.
