Fed Chair

Please click here for an enlarged chart of gold futures (GC_F).

Note the following:

• The chart shows yesterday gold had a $5.5T swing. This is an extraordinarily large swing.
• Retail momo crowd was going all in in SPDR Gold Trust (NYSE:GLD) and iShares Silver Trust (NYSE:SLV) in the early morning before the major drop.  When retail buying was exhausted, that is when gold fell.
• The chart shows gold bulls aggressively bought the dip.
• The chart shows when speculation started building last night that President Trump would nominate Kevin Warsh as the next Fed Chair.
• The chart shows persistent selling after the Warsh speculation started.
• The chart shows selling in gold has continued after President Trump announced Warsh as his pick for the next Fed Chair.
• As shown on the chart, gold is experiencing extreme volatility, but the volatility in silver is even more dizzying. In one day, silver futures have traded in the range of $95.12 – $118.45, i.e. 24.5%.
• Before reading the following, it is worth a reminder that we are politically agnostic.  Our sole job is to help investors.
• Irrespective of your opinion of President Trump, in our analysis, President Trump picking Warsh is a brilliant move.  Some see the pick as a contradiction because Warsh has a history of being ultra hawkish, and President Trump is ultra dovish.  In our analysis, there is no contradiction, just pure, strategic brilliance for President Trump to get interest rates lower.  The reason is FOMC has 19 members and only 12 vote.  A vast majority of the members are not going to go along with President Trump's desire to significantly lower interest rates.  The Fed Chair has only one vote and thus cannot accomplish dovish policy unless he succeeds at persuading other members.  The brilliance is a Fed Chair who is an ex-hawk has more credibility and a better shot at convincing other FOMC members to lower interest rates.
• At one time, there were many contenders for the Fed Chair job.  Before the list was narrowed to four, We shared in a podcast that indications pointed to Kevin Warsh as the lead candidate.  The podcast addressed why Kevin Warsh might be picked.  Of note is that we never did a podcast on any other candidate for Fed Chair.
• Producer Price Index (PPI) came hotter than expected.  Here are the details:
  • Headline PPI came at 0.5% vs. 0.2% consensus.
  • Core PPI came at 0.7% vs. 0.3% consensus.

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. 

Momo Crowd And Smart Money In Stocks

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.

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.