Weaker Inflation Brings Aggressive Buying Into Stock Market; Gold Now Second Largest Reserve Asset

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

Weaker Inflation

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

Note the following:

• The chart shows the stock market has moved into zone 1 (resistance).
•  Zone 1 has been a magnet for traders.
• RSI on the chart shows that the stock market is slightly overbought but still has room to run.
• The immediate trigger for the stock market moving into zone 1 is the release of Consumer Price Index (CPI) data.  CPI came cooler than expected.  Here are the details:
  • Headline CPI came at 0.1% vs. 0.2% consensus.
  • Core CPI came at 0.1% vs. 0.3% consensus.
• Producer Price Index (PPI) will be released tomorrow at 8:30am ET.
• Bullishness around U.S. China trade talks is dissipating.  This week's talks seem to have resulted in a return to last month's pact.  President Trump is expected to approve the agreement today or tomorrow.  Last time President Trump declared a truce with China, the stock market staged a rally.  This time the reaction is muted.  The reason is there is concern that the U.S. may have given up too much and will make China great again.  There is concern that China has the U.S. over a barrel on rare earth minerals.  As we shared with readers yesterday, China is demanding AI chips and advanced software in return for rare earth minerals.  In our analysis, rare earth mineral stocks such as MP Materials Corp (MP) and USA Rare Earth Inc (USAR) are likely to come under pressure.  As full disclosure, there is a new signal on MP in our ZYX Buy and a new signal on USAR in our ZYX Short.
• Steel stocks, such as Nucor Corp (NUE), Steel Dynamics Inc (STLD), and Cleveland-Cliffs Inc (CLF), are coming under pressure on a potential deal with Mexico on steel tariffs.  There may be buying in Mexican stocks.  As full disclosure, iShares MSCI Mexico ETF (EWW) is in our ZYX Emerging.
• The momo crowd is aggressively buying quantum computing stocks such as IONQ Inc (IONQ), Rigetti Computing Inc (RGTI), D-Wave Quantum Inc (QBTS), and Quantum Computing Inc (QUBT).  There are two triggers:
  • RGTI completed a $350M at-the-market offering.
  • IBM (IBM) announced its decision to build the world's first large-scale, fault-tolerant quantum computer.  As full disclosure, there is a new signal with a buy zone on RGTI in our ZYX Buy.  Quantum computing has the potential to be bigger than the internet.
• Gold has become the second largest reserve asset.  Please see the gold section below.
• Prudent investors will be paying close attention to the 10 year Treasury auction today.  Auction results were announced at 1pm ET.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Apple Inc (AAPL), Amazon.com, Inc. (AMZN), Alphabet Inc Class C (GOOG), Meta Platforms Inc (META), NVIDIA Corp (NVDA), and Tesla Inc (TSLA).

In the early trade, money flows are neutral in Microsoft Corp (MSFT).

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

Gold

Gold has passed the euro to become the second largest global reserve asset.  With the price of gold rising about 62% since the beginning of 2024, at market prices, gold bullion comprises about 20% of official reserves, while the euro sits at 16%.  Central banks purchased over 1000 metric tons of gold in 2024, bringing central bank holdings to about 36K tons.  This is approaching the all time high of 38K tons from 1965.  China, India, Turkey, and Poland were among the heaviest gold buyers in 2024.  

The most popular ETF for gold is SPDR Gold Trust (GLD).  The most popular ETF for silver is iShares Silver Trust (SLV). 

Today's Best Finance Deals

Oil

API crude inventories came at a draw of 0.37M barrels vs. a consensus of a build of 0.7M barrels.  This data is bullish for oil.  

In another bullish development, U.S. oil production is likely to fall next year. 

The most popular ETF for oil is United States Oil ETF (USO).

Bitcoin

Bitcoin is seeing buying.

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.