Speculative Fever Highest Since 2021; Make China Great Again

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

Speculative Fever

Please click here for an enlarged chart of Invesco QQQ Trust Series 1 QQQ.

Note the following:

• The chart shows QQQ has reached the low band of zone 1 (resistance).
• RSI on the chart shows tech stocks are slightly overbought, but there is room for QQQ to run higher.
• The chart shows Arora buy signals near the lows.
• Based on our proprietary analysis, speculative fever in the stock market has reached the highest level since 2021.  Historically, speculative fever continues to run unabated until some force stops it.  Often, the force is a macro event or smart money selling.  The speculative fever of 2020 – 2021 ended in 2022 because the Fed woke up after being asleep at the switch for a long time and started raising interest rates.    In 2022, QQQ fell by 33%.
• It is important for prudent investors to understand what is driving the speculative fever.  Here are the key factors driving speculation:
  • TACO trade (Trump Always Chickens Out)
  • Not only the momo crowd, but also Wall Street has come to believe that tariffs are no longer an issue.
  • Wall Street has come to believe that there is nothing in geopolitics that can possibly go wrong such as the Russia Ukraine War, China attacking Taiwan, Iran developing a nuclear weapon, or North Korea threatening South Korea.
  • Tax cuts are coming.
  • Even if the Senate changes the "One Big Beautiful Bill," there will be more deficit spending and borrowing.
  • President Trump has successfully sidelined deficit hawks such as Elon Musk.
  • Republicans will start stimulating the economy in order to win the midterm election.
  • President Trump wants Fed Chair Powell to cut interest rates by 100 basis points.  Even if President Trump does not fire Powell, President Trump is going to make Powell ineffective by naming Powell's replacement soon.
  • The belief is now widespread that inflation is dead.
  • There is super excitement for AI, nuclear power, space, quantum computing, robotics, and robotaxis.
  • The excessive valuations do not matter because the momo crowd does not do any deep analysis and lives in an echo chamber that stonks are going to the moon.
  • Falling dollar will help profits of multinational companies in the short term.
• The speculative fever will be tested tomorrow when the Consumer Price Index (CPI) is released at 8:30am ET.
• Adding to the bullishness is the Trump administration reporting progress in trade talks with China.
• We have previously shared with you over a period of time that America in some ways is a prisoner to China due to China's dominance of rare earth minerals and the need for rare earth minerals in defense technologies, EVs, jet engines, and other industries. Plenty of rare earth minerals are available in the U.S. and in the world outside China.  However, it is bad government policies of the U.S. and Europe that have allowed China to become so dominant.  Also contributing is the focus of industry in the U.S. on profits at the expense of national security.  China is demanding AI chips and advanced software in return for rare earth minerals.  There is significant buying in the stock market on speculation that President Trump will declare victory but, in reality, give China most of what China wants.  
  • In our analysis, prudent investors should not buy into the consensus.  President Trump cares deeply about national security.  Do not expect President Trump to readily jump on the "make China great again" bandwagon.  Investors who are playing the TACO trade seem to believe that President Trump will pick winning the midterm election over not giving China advanced chips and software.  
  • There is a report that President Trump has given Treasury Secretary Bessent authority to loosen export controls, so China can access advanced technology that the U.S. has been restricting in the interest of national security. 
• Wall Street is salivating over "Trump accounts" for newborns.  Under the proposal, the government will fund the accounts with $1000 for each baby and provide more tax breaks.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Meta Platforms Inc (META), Tesla Inc (TSLA), and NVIDIA Corp (NVDA).

In the early trade, money flows are neutral in Amazon.com, Inc. (AMZN), Microsoft Corp (MSFT), Alphabet Inc Class C GOOG, and Apple Inc (AAPL).

In the early trade, money flows are positive in SPDR S&P 500 ETF Trust (SPY) and Nasdaq 100 ETF (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).

Today's Best Finance Deals

Bitcoin

Bitcoin is seeing buying on heightened speculative fever.

Arora Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.  Our proprietary Protection Band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.

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.