Silver Breaks Out In A Short Squeeze, Rising Yields In Japan Hits Stocks and Bitcoin

Rising Yields In Japan

Please click here for a chart of iShares Silver Trust (NYSE:SLV).

Note the following:

• The chart shows silver has broken out.
• In our analysis, the breakout is the result of a short squeeze.
• If a short squeeze takes hold, silver can go to $70.  
• Quantitative tightening (QT) ending, an interest rate cut, and a dovish Fed are all positive for silver.
• We have been sharing with you the importance of yields in Japan and the impact on the U.S. markets.  In the early trade, both stocks and cryptos are seeing selling due to yields in Japan rising.
• Bank of Japan (BOJ) Governor Ueda is indicating a potential rate increase this month.  Japanese government bond yields are responding by rising to the highest levels since the 2008 financial crisis.  The two year yield is up 3 bps to 1.02%, the five year yield is up 7 bps to 1.3%, and the ten year yield is up 7 bps to 1.87%.  The yen is also strengthening.
• Rising yields in Japan have three implications for the U.S. markets:
  • Many funds have been borrowing billions of dollars in Japan and investing in the AI trade in the U.S.  If the yields in Japan continue to rise and the yen strengthens, there is potential for the carry trade in the AI trade to unwind.
  • There is a long standing very large trade of funds borrowed in Japan being used to buy bonds in the U.S.  This trade has the potential to unwind.
  • Japanese institutions have been big buyers of U.S. Treasuries.  The higher yields at home may not only stop Japanese institutions from buying U.S. Treasuries but also prompt selling of U.S. Treasuries.  In such a scenario, there is potential for long term yields in the U.S. to rise even if the Fed cuts interest rates.
• In our analysis, the markets in the U.S. are not ready for the following:
  • The carry trade unwinding
  • Long term yields in the U.S. rising even when the Fed cuts rates 
• You may recall the spot on our call in September 2024, which was highly contrarian when it was made.  At that time, almost everyone was rushing to buy long bonds in anticipation of Fed rate cuts.  Our call was that long term rates would rise if the Fed cut interest rates by 50 bps.  The Fed cut the Fed funds rate from 5.25% – 5.50% to 4.75% – 5.00%.  In response, contrary to the consensus, the ten year yield rose from mid-3% to 4.3%.
• Going into the year end, the stock market will have both positive and negative crosscurrents.  Whichever direction the stock market starts moving, Wall Street machines will jump on in that direction, exaggerating the move.
• Here are the positive crosscurrents:
  • QT is ending today.  QT ending will increase liquidity and help risk assets.
  • Underperforming money managers will chase by aggressively buying the best performing stocks.
  • In our analysis, there is a 70% probability of a Fed rate cut. However, the consensus is about a 90% probability of a rate cut.
  • Seasonality is positive.
  • Going into December, volatility is coming down.
  • Positioning is no longer stretched.
• Here are the potential negative crosscurrents:
  • Inflation data is hotter than expected.
  • If the Fed cuts rates, the Fed will be cutting rates in a 3% inflation environment at a time when liquidity is already high and the stock market is near its high.  This has the potential to raise serious concerns about the Fed's resolve to fight inflation.
  • The Fed does not cut rates.
  • The Fed is hawkish about future rate cuts.
  • Yields in Japan are rising.  If yields in Japan rise further, there is potential for the carry trade to blow up.
• President Trump has decided the next Fed chair.  The announcement of a new Fed chair and speeches from the new Fed chair may be a double-edged sword.  It has the potential to make the stock market soar.  However, it also has the potential to cause the stock market to drop on concerns about the Fed losing independence.
• Cryptos and the stock market have become linked.  Many investors who are heavily invested in cryptos are also heavily invested in AI stocks.  Often, these investors are using significant leverage.  Moves in cryptos will be reflected in the AI trade.
• Expect blind money to flow into the stock market today and tomorrow.  Blind money is the money that flows into the stock market on the first two days of the month without any analysis irrespective of market conditions.
• The momo crowd is aggressively buying the early morning dip in the stock market caused by rising yields in Japan.

AI Trade Shift

Alphabet Inc Class C (NASDAQ:GOOG) stock has had a strong move on the release of Gemini 3 and excitement about Google's tensor processing unit (TPU).

Misconceptions are widespread.  In our analysis, here is what is likely to happen over the coming years:

• Expect large language models to go through cycles of leapfrogging each other.
• Google using custom TPUs in its own models and in its own environment is very different from Google becoming a dominant TPU vendor of chips sold to other companies running different models.
• We have been expressing for the last three years that custom ASICs will give serious competition to NVIDIA Corp (NASDAQ:NVDA).  The market is just now waking up to this fact. 

Venezuela

President Trump has said that the air space around Venezuela should be considered closed.  If the U.S. attacks Venezuela, expect the stock market to rally.

Taiwan Risk

Prudent investors need to note that 2027 is the 100th anniversary of the founding of the People's Liberation Army in China.  The concern is that to celebrate the 100th anniversary and for domestic political reasons, China may attack Taiwan.  Such an attack will be very negative for stock markets across the globe if the U.S. comes to Taiwan's aid.  However, prudent investors should also be aware that speculation is building that in lieu of trade concessions from China, the U.S. may not help Taiwan.

Taiwan is important because chip manufacturing is concentrated in Taiwan.  If Taiwan Semicndctr Mnufctrng Co Ltd‘s (NYSE:TSM) operations are disrupted, that may be devastating to the AI trade but good for Intel Corp (NASDAQ:INTC).

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks.  For this reason, it is important to pay attention to early money flows in the Mag 7 stocks on a daily basis. 

In the early trade, money flows are negative in Amazon.com, Inc. (NASDAQ:AMZN), Nvidia (NVDA), Microsoft Corp (NASDAQ:MSFT), Alphabet (GOOG), Meta Platforms Inc (NASDAQ:META), Tesla Inc (NASDAQ:TSLA), and Apple Inc (NASDAQ:AAPL).

In the early trade, money flows are negative in SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust Series 1 (NASDAQ:QQQ).

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust (GLD).  The most popular ETF for silver is silver ETF (SLV).  The most popular ETF for oil is United States Oil ETF (USO).

Bitcoin

Bitcoin (CRYPTO: BTC) is seeing selling.

What To Do Now

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider a protection band consisting of cash or Treasury bills or short-term tactical trades as well as short to medium term hedges and short term hedges. 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.

The Arora Report is known for its accurate calls. The Arora Report correctly called the big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, the DJIA rally to 30,000 when it was trading at 16,000, the start of a mega bull market in 2009, and the financial crash of 2008. Please click here to sign up for a free forever Generate Wealth Newsletter.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.