#### Shocking Jobless Claims
Note the following:
- The chart shows IWM is close to the top band of zone 1 (resistance).
- RSI on the chart is indicating a high probability of breaking out above zone 1.
- The move up in small caps is being driven by the higher probability of a rate cut as shown by Fed fund futures. If the stock market pays attention to the just released jobless claims data, bulls will be disappointed as IWM may not immediately break out.
- As full disclosure, IWM is in our portfolio.
- In a shocker, initial jobless claims came at 191K vs. 220K consensus. This is very strong data. Prudent investors should note the contrast between this strong data about jobs and the weak data from ADP yesterday. The difference might be that ADP's data is only private payrolls, whereas initial jobless claims includes government jobs. Overall, the data does not support a rate cut in December. For this reason, in our analysis, the probability of a rate cut in December is 70%, but Fed fund futures are predicting about a 90% probability of a rate cut.
- Yields in Japan rose again. The yield on the 10 year Japanese government bond (JGB) rose to its highest level since 2007.
- The 30 year JGB auction received the strongest demand since 2019. The 30 year yield was 3.44% before the auction but fell to 3.39% after the auction. In our analysis, the move in the 30 year JGB was likely driven by short covering.
- Prudent investors need to keep an eye on yields in Japan because of the carry trade. Funds have borrowed about $1T in the long standing carry trade and invested in the US.
- It used to be that in the carry trade, the money was invested in U.S. fixed income. However, over the last couple of years, the money borrowed in Japan has been invested in the AI trade in the U.S. As a reference point, the yield on the 10 year JGB was -0.3% in 2016, and then it rose and subsequently fell to -0.295% in 2019. Now, the yield has risen to 1.92%.
- One of the factors driving yields higher in Japan is Prime Minister Takaichi's $135B fiscal stimulus program.
- In our analysis, if the carry trade blows up, there is a 10% – 20% correction risk to the AI trade.
- Microsoft Corp(NASDAQ: MSFT) has pushed back on the report that it is cutting sales quotas for some AI products. Microsoft's push back helped lift the stock market yesterday.
- Three notable earnings have been from Salesforce Inc (NYSE: CRM), Snowflake Inc (NYSE: SNOW), and Kroger Co (NYSE: KR). Among notable earnings, Salesforce earnings are inline with whisper numbers, Snowflake earnings are below whisper numbers, and Kroger earnings are below whisper numbers.
- ISM services came at 52.6 vs. 52.4 consensus. A number above 50 is considered expansion.
- Investors are eagerly awaiting the Fed's preferred inflation gauge PCE that will be released tomorrow morning.
#### China And India
The Chinese currency yuan has reached a 14 month high against the dollar. The momo crowd loves a weak dollar because it drives the stock market higher in the short term. However, as we have been sharing with you, in the long term, the hallmark of a strong country is a strong currency. The yuan strengthening against the dollar is proof positive that China has gained the upper hand over the U.S. in trade negotiations.
This is also evident from the deference President Trump is showing to China. As an example, China is the biggest importer of Russian oil, but President Trump has done nothing against China for importing Russian oil. On the other hand, President Trump has imposed 50% tariffs on India for being the second biggest importer of Russian oil. This is a long term strategic mistake for the U.S. India is responding by becoming closer to Russia and China. President Putin is visiting India for a state visit. Putin is likely to push India to buy more Russian oil and Russian arms.
#### Magnificent Seven Money Flows
Most portfolios are now heavily concentrated in the Mag 7 stocks. For this reason, it is important to pay attention to early money flows in the Mag 7 stocks on a daily basis.
In the early trade, money flows are positive in Alphabet Inc Class C (NASDAQ: GOOG), NVIDIA Corp (NASDAQ: NVDA), Microsoft (MSFT), Meta Platforms Inc (NASDAQ: META), and Tesla Inc (NASDAQ: TSLA).
In the early trade, money flows are neutral in Apple Inc (NASDAQ: AAPL), and Amazon.com, Inc. (NASDAQ: AMZN).
In the early trade, money flows in SPDR S&P 500 ETF Trust (NYSE: SPY) and Invesco QQQ Trust Series 1 (NASDAQ: QQQ) were positive before the initial jobless claims data. The money flows have turned negative after the release of the jobless claims data.
#### 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 (CRYPTO: BTC) 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