Data-No-Longer-Matters Investors Prevail; Government Is Spiking The Stock Market

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

Government Spiking Stock Market

Note the following:

• The SPDR S&P 500 ETF Trust SPY chart shows the drop in the stock market after the release of Producer Price Index (PPI) yesterday.  The PPI data was significantly hotter than expected.  Please see yesterday's Morning Capsule for details.
• The chart shows aggressive buying on hotter inflation data by investors who believe data no longer matters.
• The VUD indicator is the most sensitive measure of net supply demand in real-time. The orange represents net supply and the green represents net demand.  The chart shows the VUD has turned green, indicating net demand for stocks.
• We have been sharing with you that the narrative of "data no longer matters" is taking hold among the momo crowd.  The chart shows "data no longer matters" investors prevailed.  The thinking is that irrespective of the data, President Trump will succeed in getting the rate cuts he wants.
• In our analysis, there is some merit to the thinking of the "data no longer matters" crowd.  With reckless government spending, heavy government borrowing, and artificially lower interest rates, the U.S. government can succeed in spiking the stock market in the short term.  In the long term, these actions are likely to be very negative.  However, the momo crowd does not think about the long term.
• Retail investors are super excited and are continuing their stock buying binge.  The margin debt of retail investors has now exceeded $1T.  History tells us that when margin debt rises sharply, prudent investors need to be careful.
• In contrast to retail investors' exuberance about the stock market, institutional investors are cautious.
• The Buffett effect is helping the stock market.  Warren Buffett bought health insurer UnitedHealth Group Inc (UNH), home builders Lennar Corp Class A (LEN) and DR Horton Inc (DHI), and steel maker Nucor Corp  (NUE).  Buffett also sold a large amount of Apple Inc (AAPL).  Investors are focused on what Buffett bought and ignoring what he sold.
• Dow Jones Industrial Average is being helped by about a 10% move in UNH
• In important news, the U.S. is contemplating taking a stake in Intel Corp (INTC).  The stock is rising on the news.  As full disclosure, INTC is in our portfolio.
• Prudent investors closely watch retail sales data as the U.S. economy is 70% consumer based.  Retail sales came inline with expectations.  Here is the latest retail sales data.
  • Headline retail sales came at 0.5% vs. 0.5% consensus.
  • Retail sales ex-auto came at 0.3% vs. 0.3% consensus.
• University of Michigan Consumer Sentiment was released at 10am ET.
• President Trump and President Putin are meeting in Alaska today.  The momo guru narrative is that the stock market will go up about 2000 DJIA points after the meeting.  In our analysis, President Trump has the leverage to succeed.  Will President Putin be receptive? Investors should start with our Second Law of Investing and Trading, which states, "Nobody knows with certainty what is going to happen next in the markets."

China

China is the second largest economy in the world.  Therefore prudent investors pay attention to economic data from China.  The latest data from China is showing a weakening economy.  Here are the details:

• Industrial production came at 5.7% year-over-year vs. 6.0% consensus.
• Retail sales came at 3.7% year-over-year vs. 4.6% consensus.
• The unemployment rate came at 5.2% vs. 5.1% consensus.

Magnificent Seven Money Flows

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

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

In the early trade, money flows are neutral in S&P 500 ETF (SPY) and negative 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 is range bound.

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.