The Nasdaq 100, represented by the Invesco QQQ Trust Series 1 (QQQ), is currently in a critical juncture, poised for a potential breakout. While the S&P 500 has already broken out, QQQ has lagged behind. This lag can be attributed to its heavy weighting in the ‘Magnificent Seven’ tech giants, five of which are reporting earnings this week: Apple, Amazon, Alphabet, Meta, and Microsoft. These earnings reports hold the key to unlocking QQQ’s breakout potential.
The Relative Strength Index (RSI) on the QQQ chart suggests that a breakout is easily achievable, and the current earnings season is a potential catalyst. With approximately half of the S&P 500 companies reporting this week, and about 75% exceeding consensus estimates (slightly below the five-year average of 77%), positive sentiment is prevailing.
Further fueling the market’s momentum is the ‘front-running’ of the upcoming election. Historically, the stock market tends to rise after elections. However, due to this year’s preemptive rally, the strength of this pattern might be diminished. Nevertheless, the momentum from this front-running is evident in the current aggressive buying, particularly in growth-oriented stocks.
Across the Pacific, Japan is experiencing a significant shift. The ruling party has lost its parliamentary majority, leading to a weakening yen against the dollar. This has triggered a decline in long-term Japanese government bonds and a rise in Japanese stocks, driven by the yen’s weakness and Japan’s export-oriented economy. The weakening yen might prompt the Bank of Japan (BOJ) to intervene by buying yen or raising interest rates to counter its decline. From a long-term perspective, the yen is considered undervalued.
Meanwhile, money flows are positive in several key stocks, including NVIDIA, Tesla, Amazon, Microsoft, Alphabet, Meta, and Apple, as well as in the SPDR S&P 500 ETF Trust (SPY) and the Nasdaq 100 ETF (QQQ). This positive flow indicates strong investor confidence in these specific sectors.
Investors can gain an edge by closely monitoring money flows in SPY and QQQ. However, a greater advantage can be achieved by understanding when smart money is actively investing in stocks, gold, and oil. The most popular ETFs for these asset classes are SPDR Gold Trust (GLD) for gold, iShares Silver Trust (SLV) for silver, and United States Oil ETF (USO) for oil.
Bitcoin (BTC/USD) continues to see strong buying activity, fueled by increasing prospects of a Trump victory. Trump has received significant campaign contributions from the cryptocurrency industry.
It is crucial for investors to adopt a forward-looking approach and not dwell on past performance. Maintaining existing long-term positions in quality stocks is a prudent strategy. Investors should also consider establishing a ‘protection band’ consisting of cash, Treasury bills, short-term tactical trades, and short-to-medium-term hedges. This band acts as a buffer against market fluctuations while allowing participation in potential upside gains.
The level of the protection band can be adjusted based on individual risk tolerance. A high band is suitable for older or conservative investors, while a low band is more appropriate for younger or aggressive investors. If hedging is not employed, the total cash level should be higher than with hedges but significantly lower than the combined amount of cash and hedges.
A protection band of 0% signifies a highly bullish stance, indicating a fully invested portfolio with no cash reserves. Conversely, a 100% protection band signifies a bearish outlook, calling for aggressive protection measures, including cash, hedges, or short selling. It’s important to remember that holding adequate cash reserves is essential for capitalizing on new opportunities as they arise.
When making adjustments to hedge levels, consider adjusting partial stop quantities for stock positions (excluding ETFs). Utilize wider stops for remaining quantities and allow greater room for high-beta stocks, which tend to move more significantly than the overall market.
Traditional 60/40 portfolio allocations, which allocate 60% to stocks and 40% to bonds, do not favor long-duration strategic bond allocations at this time. Those who prefer sticking to this traditional approach may consider focusing on high-quality bonds with a duration of five years or less. Investors seeking a more sophisticated approach may opt for bond ETFs as tactical positions rather than strategic ones.
The Arora Report, known for its accurate market calls, has correctly predicted several significant market events, including the AI rally, the 2023 bull market, the 2022 bear market, new market highs after the 2020 virus low, the 2020 virus drop, 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.
