For Investors, The Highest-Probability Scenario From Israel-Iran War Isn't What You Think - It's A Trump Card

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

Raise Cash And Hedges

In the Israel Iran war, we have analyzed 28 different scenarios as they pertain to investors.  The process to change our Protection Band involves assigning a probability to each scenario and adding it to the unique, adaptive ZYX Asset Allocation Model.  Remember, this is war, and things can change very quickly.  Nothing is cast in stone. 

• Investors should follow the Arora Principle: Give precedence to return of capital over return on capital.  The importance of this principle is easy to understand when you consider the following scenario: If you lose 50%, you have to make 100% to get back to even.  
• TACO traders, the momo crowd, and the meme crowd will buy every dip in the stock market.  Aggressive buying from these groups will help cushion any stock market drop and may even cause the stock market to rise.
• TACO traders, the momo crowd, and the meme crowd will sell only if they are forced to sell because of margin calls.  If these groups get margin calls, the stock market can experience a large, sharp drop.  
• Option expiration is next week.  As of this writing, in our analysis, the positioning in options will put upward pressure on the stock market.  However, note that positioning in options can change very quickly.  Positioning is an important Wall Street mechanic.  Understanding Wall Street positioning can give investors a big edge.

Important Reminder

As an important reminder, existing positions in defense and aerospace equities, oil equities, gold, silver, precious metal miners, and some international positions as well as short positions act as important additional hedges on top of our Protection Band.

Highest Probability Scenario But A Trump Card

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 drop in the stock market after Israel's attack on Iran.
• RSI on the chart shows the stock market is no longer overbought.
• Of the 28 scenarios analyzed, the highest probability scenario is the following:
  • Iran being a great power will become a thing of the past.
  • Iran's air defense capability will be decimated.
  • Israel will end up reducing both Iran's nuclear capabilities and ballistic missile capabilities.
• In the most probable scenario, Iran's regime will face an existential threat.
• Here is the key question for investors: Faced with an existential threat, will Iran play its trump card?
  • The trump card is blocking the Strait of Hormuz.  The Strait of Hormuz is important because one quarter of the world's petroleum is shipped through the strait.
  • Iran has the capability to block the strait.
  • Israel does not have the capability to stop Iran from blocking the strait.
• In our analysis, President Trump will likely try to keep the U.S. out of the war.  However, if Iran attempts to block the Strait of Hormuz, President Trump will have a difficult decision to make since the U.S. is the only world power capable of preventing Iran from blocking the Strait of Hormuz.
• Prudent investors should keep in mind that although the most probable scenario is not for a bear market, there are scenarios with a fair probability that can cause a major stock market drop. 
• University of Michigan Consumer Sentiment was released at 10am ET.

Magnificent Seven Money Flows

In the early trade, money flows are neutral in Apple Inc (AAPL).

In the early trade, money flows are negative in Amazon.com, Inc. (: AMZN), Alphabet Inc Class C (GOOG), Meta Platforms Inc (META), Microsoft Corp (MSFT), NVIDIA Corp (NVDA), and Tesla Inc (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).

Bitcoin

Bitcoin initially saw some selling, but the dip is being bought.

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.