By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Breakdown Starting On A Global Basis
Please click here for a chart of 7 – 10 year Treasury ETF IEF.
Note the following:
- Breakdowns are starting on a global basis. Events in Japan and the UK are driving US stocks lower. Be very careful with mainstream media. There is a lot of noise and no focus on the important breakdowns on a global basis. We got you ahead of the curve yesterday, as we have done for a very long time. The Morning Capsule headline read in part “JAPAN INTERVENES IN FX MARKETS.”
- In yesterday’s Morning Capsule, we wrote,
Japan has intervened for the first time since 1998 to stop the yen from falling. Japan is the only major central bank still pursuing easy money policy.
- In the intervention to stop the yen from falling further, the Bank of Japan sold dollars and bought yen. Where do you think the dollars come from? To boost its dollar reserves, in The Arora Report analysis, the Bank of Japan was likely selling 10-year Treasuries.
- The chart shows that 10-year Treasuries were hanging in for a while at the support.
- The chart shows that 10-year Treasuries broke down, presumably by selling from the Bank of Japan. If our analysis is correct, selling by the Bank of Japan could not have come at a worse time as international investors were already jittery after Powell’s press conference on Wednesday.
- Yield on 10-year Treasuries is the benchmark that, in part, determines price earnings ratios. Bonds move inverse to the yield. When yields go up, bonds go down, as shown on the chart.
- The rising yield on 10-year Treasuries means that price earnings ratios on stocks will contract.
- The valuation of stocks is calculated using a discount rate based on 10-year Treasuries to determine the present value of the future earnings stream.
- These are extremely important concepts that every serious investor should master. In the environment we see for the next few years, investors who do not master these concepts will be at a big disadvantage.
- Those who have not yet mastered the concepts, but want to master them, listen to the podcast titled “Be Careful with Popular Long Duration Stocks.”
- Putting further pressure on the stock market today is that the pound is hitting a 37-year low.
- The reason is that the interest rates in the UK are jumping sharply.
- Interest rates in the UK are jumping sharply because of the British government’s plan for the biggest tax cuts since the 70’s. This comes on top of billions the British government plans to spend to subsidize energy costs for consumers and businesses over the next two years.
- You may be thinking how is the British government going to pay for these tax cuts and subsidies. You probably guessed the answer correctly – the UK is going to heavily borrow more.
- The fear is that just like the UK, other countries will also go on a borrowing binge. This is on top of the borrowing binge during the pandemic.
- The fear from the moves in the yen and the pound is that serious dislocation in the forex market may be ahead. If such dislocations occur, they will have a significant impact on the earnings of S&P 500 companies.
- The chart shows that RSI is very oversold. This means that the 10-year Treasuries can quickly rally. If 10-year Treasuries rally, the stock market has the potential to have a face ripping rally. In our analysis at The Arora Report, such a rally will likely be a bull trap.
- As an actionable item, pay close attention to the ‘Protection Band And What To Do Now?’ section below.
Bear markets end. The best buying opportunities occur in bear markets. Stay tuned.
DJIA is poised to take out June lows. DJIA has been the strongest of the three major indexes, the other two being S&P 500 and NASDAQ. From a technical perspective, this is a negative development.
Goldman Sachs Cut
Why is The Arora Report a must read for many money managers on Wall Street who work for big prestigious banks with large in-house research departments? You already know the answer – The Arora Report helps investors and money managers get ahead of the curve.
Most Wall Street strategists still have full allocation to stocks and very little cash and hedges. The news this morning is that the dominos are beginning to fall. Goldman Sachs (GS) has just cut its year-end target to 3600. Goldman Sachs’s target as of yesterday was 4300.
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.
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.
There is selling in bitcoin along with speculative momo stocks.
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 but this can quickly reverse as described above.
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 $1664, silver futures are at $19.20, and oil futures are at $79.84.
S&P 500 futures resistance levels are 3770, 3860 and 3950: support levels are 3630, 3600 and 3520.
DJIA futures are down 286 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 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.
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