TACO Traders Unfazed But Prudent Investors Pay Attention To Trump's Latest Plan And Iran, Cooler PPI

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

Unilateral Tariffs

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 pulled back from the low band of zone 1 (resistance).  Zone 1 has been a magnet for traders.
• RSI on the chart shows that the stock market is slightly overbought, indicating it has room to run but could also pull back.
• The momo crowd is oblivious, but prudent investors should pay attention to two facts about the Trump administration’s deal with China on rare earth minerals.
  • The deal is only for six months.  In our analysis, the six month period allows China to maintain leverage against the U.S.
  • From our sources, it appears that China is asking for sensitive information from companies seeking rare earth minerals from China.
• President Trump has indicated that he intends to set unilateral tariffs in the next two weeks.  This would be in advance of the end of the 90 day pause.
  • In our analysis, TACO traders are buying on weakness caused by President Trump's latest comment because they believe President Trump will chicken out.  
  • In our analysis, prudent investors should be prepared for a scenario of President Trump not chickening out.  
• Bilateral deals are in work with Japan, South Korea, India, and the E.U., causing bullishness in the stock market.
• Nuclear tension in the Middle East is heating up.  After the U.N. atomic agency declared Iran failed to comply with nuclear nonproliferation obligations, Iran declared it would increase uranium production with a new uranium enrichment facility and more advanced equipment.  In further escalation, Iran said if international sanctions are imposed as a consequence, it would leave the Non-Proliferation Treaty and kick out inspectors.  Additionally, Iranian Defense Minister Amir Aziz Nasirzadeh said U.S. military bases would be targeted if there is a conflict.  
  • From our sources, it appears that the U.S is on red alert.  It appears non-essential personnel are being evacuated from the U.S. embassy in Iraq and other Middle Eastern countries.
  • Last night there was a report that an Israeli attack on Iran was imminent.  Oil first jumped on the report.  Oil pulled back when the report did not prove correct.   
  • President Trump said earlier this week that he is less confident in striking a deal with Iran.  
• In our analysis, TACO traders are buying on the weakness caused by Iran on the belief that President Trump will chicken out.  
• In our analysis, prudent investors should be very concerned if Israel attacks Iran with U.S. support or the U.S. directly attacks Iran.  Pay attention to the our Protection Band.    
• The just released Producer Price Index (PPI) shows inflation at the producer level cooler than expected.   Here are the details:
  • Headline PPI came at 0.1% vs. 0.2% consensus.
  • Core PPI came at 0.1% vs. 0.3% consensus.
• Initial jobless claims came at 248K vs. 250K consensus.  In our analysis, the employment picture is weakening.
• Boeing Co (BA), Spirit AeroSystems Holdings Inc (SPR), and General Electric Co (GE) stocks are falling on the first ever crash and hull loss of a Boeing 787 Dreamliner operated by Air India.  In our analysis, there is a low probability of a manufacturing defect because the plane had been in operation since 2011.  
• The momo crowd is selling blue chips like NVIDIA Corp (NVDA) and Tesla Inc (TSLA) to buy speculative quantum computing stocks such as Rigetti Computing Inc (RGTI), IONQ Inc (IONQ), Quantum Computing Inc (QUBT), and D-Wave Quantum Inc (QBTS) as well as smart modular reactor stocks Oklo Inc (OKLO) and Nuscale Power Corp (SMR).  OKLO is taking advantage of the rise to sell $400M of common stock.
• The meme crowd is suffering big losses as their favorite stock GameStop Corp (GME) falls by 17% on the announcement of a $1.75B convertible senior note offering.
• AI software stocks are getting a boost from Oracle Corp (ORCL) beating consensus and whisper numbers.
• Adobe Inc (ADBE) earnings are ahead after the close.  Adobe earnings are important because ADBE has become a battleground stock – bulls believe ADBE stock will go to the moon because of AI; bears believe AI will decimate Adobe's business.  This illustrates the difficulty with software stocks right now as some software companies will benefit from AI while others will get into trouble because they are not AI native.  Investors should consider AI native software stocks such as Palantir Technologies Inc (PLTR) or iShares Expanded Tech-Software Sector ETF (IGV).  As full disclosure, PLTR is in our ZYX Buy Core Model Portfolio.  IGV is in our ZYX Allocation Model Portfolio.
• In our analysis, prudent investors should be very concerned that  the dollar is hitting a three year low.  
• In our analysis, prudent investors should balance the falling dollar, President Trump's new plan on unilateral tariffs, and the Iran situation against the aggressive buying by TACO traders, momo crowd, and meme crowd.  

Magnificent Seven Money Flows

In the early trade, money flows are positive in Apple Inc (AAPL) and Microsoft Corp (MSFT).

In the early trade, money flows are negative in Amazon.com, Inc. (AMZN),  Alphabet Inc Class C (GOOG), Meta Platforms Inc (META), NVDA, and TSLA.

In the early trade, money flows are negative 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).  The most popular ETF for oil is United States Oil ETF (USO).

Gold

The situation in the Middle East is bringing buying into gold.  

Bitcoin

Bitcoin is seeing light selling as bitcoin bulls are disappointed that bitcoin whales took profits at the resistance instead of running bitcoin through the resistance.

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.