The semiconductor sector is experiencing volatility following Nvidia’s earnings. The VanEck Semiconductor ETF (SMH) formed a double top pattern, a bearish indicator, before dropping to support levels. While the sector has rebounded, the Relative Strength Index (RSI) suggests it is overbought, making it vulnerable to further declines. Despite this, the ‘momo’ crowd is aggressively buying into semiconductors ahead of Nvidia’s earnings, expecting a repeat of past performance. However, investors should remember that historical trends do not always predict future outcomes.
Recent revisions to US payroll data have also impacted market sentiment. The Bureau of Labor Statistics revised down payrolls by 818,000 for the year ending in March, the largest downward revision since 2009. This delayed release of data initially caused a market spike, with some believing it would encourage the Federal Reserve to implement larger rate cuts. However, investors who were aware of the data revision sold into the spike, recognizing that it didn’t include data beyond March.
The Federal Open Market Committee (FOMC) minutes indicated a dovish stance, suggesting that the Fed is likely to cut rates in September. Weekly jobless claims also came in at 232,000, slightly higher than the consensus of 225,000. Notably, the stock market is reacting more strongly to jobless claims below the consensus, highlighting the prevailing bullish sentiment.
In terms of money flows, early trade shows positive movement in major stocks like Apple (AAPL), Amazon (AMZN), Alphabet (GOOG), Meta (META), Nvidia (NVDA), and Tesla (TSLA). Microsoft (MSFT) displays neutral flows, while the SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ) exhibit mixed flows.
Understanding money flows in SPY and QQQ can provide investors with an edge, but knowing when smart money is buying stocks, gold, and oil can give them an even bigger advantage. Popular ETFs for gold, silver, and oil include SPDR Gold Trust (GLD), iShares Silver Trust (SLV), and United States Oil ETF (USO), respectively.
Bitcoin (BTC/USD) is experiencing buying pressure, likely influenced by the Harris campaign’s support for cryptocurrencies.
In light of these market conditions, investors are advised to focus on long-term positions and consider establishing a protection band. This band can consist of cash, Treasury bills, short-term tactical trades, and short to medium-term hedges, providing a way to protect capital while participating in potential upside.
The level of protection within this band should be determined by individual risk tolerance. Younger and more aggressive investors can opt for a lower protection band, while older and more conservative investors may prefer a higher band.
A protection band of 0% would indicate a fully invested portfolio with no cash, while a 100% protection band would reflect a highly bearish outlook with significant allocation to cash and hedges or aggressive short selling. Remember, holding enough cash allows investors to take advantage of new opportunities.
When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (excluding ETFs). Use wider stops for remaining quantities, and provide more leeway for high-beta stocks, which tend to move more than the market.
Traditional 60/40 portfolios, which allocate 60% to stocks and 40% to bonds, may not be optimal at this time due to the risks associated with long-duration bond investments. Investors adhering to this allocation strategy may consider focusing on high-quality bonds with maturities of five years or less.
For those seeking a more sophisticated approach, bond ETFs can be used tactically rather than strategically.
The Arora Report has consistently made accurate calls, predicting major market events like the artificial intelligence rally, the new bull market of 2023, the bear market of 2022, and the financial crash of 2008.
