Small Caps Outperform Mag Seven; Key Economic Data Ahead; Gold Buying On Dollar Debasement Fears

Small Caps Outperforming

Please click here for an enlarged chart of small cap iShares Russell 2000 ETF (NYSE:IWM).

Note the following:

• Over the last month, small caps ETF IWM has outperformed the Magnificent Seven represented by Roundhill Magnificent Seven ETF (BATS:MAGS) by 5%.
• On December 4, we wrote in the Morning Capsule:

The move up in small caps is being driven by the higher probability of a rate cut as shown by Fed fund futures.

• Money has been flowing into small caps since the latest Fed rate cut.
• The chart shows IWM broke out above zone 1 (support).
• RSI on the chart shows IWM has pulled back but is still in the overbought zone.  This RSI pattern often leads to higher prices.  IWM may become more overbought.
• Seasonality favors small caps.
• IWM is in our portfolio.
• It is important that investors are diversified beyond the Magnificent Seven.
• The official jobs report will be released tomorrow at 8:30am ET and may be market moving.  October Retail sales and housing starts will also be released tomorrow at 8:30am ET.
• Additional economic data is ahead:
  • November retail sales will be released on Wednesday at 8:30am ET.
  • Consumer Price Index (CPI) and initial jobless claims will be released on Thursday at 8:30am ET.
  • On Friday, the Fed's favorite inflation gauge PCE will be released at 8:30am ET, along with personal income and spending.  University of Michigan consumer sentiment will be released at 10am ET.
• If all of the foregoing data is benign, expect that stock market to ratchet up.  However, if the data is concerning, data driven selling can overcome positive seasonality.

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 positive in Apple Inc (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc Class C (NASDAQ:GOOG), NVIDIA Corp (NASDAQ:NVDA), and Tesla Inc (NASDAQ:TSLA).

In the early trade, money flows are neutral in Meta Platforms Inc (NASDAQ:META) and Microsoft Corp (NASDAQ:MSFT).

In the early trade, money flows are positive 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 (NYSE:GLD).  The most popular ETF for silver is iShares Silver Trust (NYSE:SLV).  The most popular ETF for oil is United States Oil ETF (USO).

Gold

Buying in gold and silver is very aggressive.  Here are the key points:

• The Fed cut interest rates even when the data did not justify it.
• President Trump may name Kevin Hassett as the next Fed chair.
• The foregoing are raising alarms that the U.S. government is about to tacitly debase the dollar.
• To protect themselves, investors are rushing into gold.
• Central banks continue to buy gold.  

The momo crowd is aggressively buying gold in the early trade.  Smart money is inactive in the early trade.

As full disclosure, gold ETF (GLD), Gold miner Newmont Corporation (NYSE:NEM) and silver ETF (SLV) are in our portfolio.   An additional trade around position in NEM stock reached its target, partial profits have been taken, and the target has been raised on the remaining quantity.  Trade around positions is a technique used by hedge funds and billionaires to dramatically increase returns and reduce risk.

Bitcoin

Bitcoin (CRYPTO: BTC) is range bound, but the rally attempts continue to be met with 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.