50 Bps Rate Cut Fever Grips Market; Small Caps Rocket; China's Foreign Inflows

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

Rate Cut Fever

Note the following:

• The iShares Russell 2000 ETF (NYSE:IWM).chart shows a strong move up, about 3%, in small cap stocks yesterday.
• The chart shows in the early trade small cap stocks are moving even higher.
• The chart shows in spite of the large move yesterday, small caps are still in zone 2 (resistance).
• The chart shows small caps are still below the prior high marked by the upper band of zone 1(resistance) even though S&P 500 and Nasdaq have moved to new highs.
• Money is flowing aggressively in IWM for two reasons:
  • The belief is building that small caps will catch up.
  • Small caps are interest rate sensitive.
• A 50 bps interest rate cut fever has all of a sudden gripped the stock market after the release of CPI data.
  • Some momo gurus are even calling for a 100 bps cut.  The prevailing wisdom has shifted to the data no longer being important and President Trump will get what he wants from the Fed.  There is merit to this thinking as independent thinkers driven by data are rapidly vanishing.
• On August 4, we wrote:

In our analysis, the probability of a rate cut in September is 70%.

• The probability of a rate cut in September has now risen to 85%.  In our analysis, there are still some independent thinkers at the Fed who are not going to appease President Trump.  
• In our analysis, the amount of the rate cut in September will come down to the data between now and the Fed meeting.  
• In our analysis, the Producer Price Index (PPI) data that will be released tomorrow at 8:30 am ET has gained more importance.  The stock market's reaction to PPI will confirm if the latest prevailing momo crowd wisdom of "data does not matter" is transient or longer term.
• On the 50 bps rate cut fever, in addition to small caps and tech stocks, money is also flowing into interest rate sensitive sectors such as housing and banks.  The housing ETF of choice is iShares US Home Construction ETF (ITB), and the banking ETF of choice is SPDR S&P Bank ETF (KBE).  As full disclosure, bank ETF KBE is in our portfolio.  Home builder KB Home (KBH) is also in our portfolio.

Money Flowing Into China

As China gains the upper hand over the U.S., foreign money is flowing into China.  Overnight, stocks in Hong Kong were up 2.6%.

Magnificent Seven Money Flows

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

In the early trade, money flows are neutral in Amazon.com, Inc. (AMZN), Microsoft Corp (MSFT), and NVIDIA Corp (NVDA).

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

Oil

Oil is being driven by speculation about the results of the Trump Putin meeting on Friday.

API crude inventories came at a build of 1.5M barrels vs. a consensus of a draw 0.8M barrels.

Bitcoin

Bitcoin is seeing buying.

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.