Big Investors Rushing to Hedge Credit Risk From AI Spending Binge – Retail Investors Oblivious

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

Hedging Credit Risk

Please click here for an enlarged chart of SPDR S&P 500 ETF Trust (NYSE:SPY) which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

• The chart shows the stock market bounced off the high band of zone 1 (support).
• The chart shows the stock market is now close to the prior high.
• Expect Wall Street to try to push the stock market to the magnet shown on the chart.  However, new data and Fed action have the potential to get in the way if they are worse than expectations.
• RSI on the chart shows the stock market is overbought, but it can become even more overbought.
• Big investors are becoming concerned about the borrowing binge to build AI data centers.  To protect themselves, these big investors are rushing to hedge the risk with credit derivatives. Big investors are also pulling back from buying AI stocks.  Retail investors are oblivious.  Retail investors among the momo crowd are very aggressively buying AI stocks.  
• Seasonality remains positive and a big driving force.
• Yesterday, the momo crowd extremely aggressively bought space stocks such as AST SpaceMobile Inc (NASDAQ:ASTS) and Rocket Lab Corp (NASDAQ:RKLB), nuclear stocks such as Oklo Inc (NYSE:OKLO), Nuscale Power Corp (NYSE:SMR), and Cameco Corp (NYSE:CCJ), and quantum computing stocks such as Rigetti Computing Inc (NASDAQ:RGTI), IONQ Inc (NYSE:IONQ), and D-Wave Quantum Inc (NYSE:QBTS).
• Sentiment is very positive and approaching extreme positive.
• Lagging money managers are aggressively chasing the winning stocks in the stock market.
• PCE, the Fed's favorite inflation gauge, as well as personal income and spending was released at 10am ET and may be market moving.

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks. 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 positive in Alphabet Inc Class C (NASDAQ:GOOG) and Microsoft Corp (NASDAQ:MSFT).

In the early trade, money flows are neutral in Apple Inc (NASDAQ:AAPL), Meta Platforms Inc (NASDAQ:META), NVIDIA Corp (NASDAQ:NVDA), and Amazon.com, Inc. (NASDAQ:AMZN).

In the early trade, money flows are negative in Tesla Inc (NASDAQ:TSLA).

In the early trade, money flows are mixed in S&P 500 ETF (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 iShares Silver Trust (SLV).  The most popular ETF for oil is United States Oil ETF (USO).

Bitcoin

Bitcoin (CRYPTO: BTC) is range bound.

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.