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

Take More Partial Profits On Tactical Trades

Consider continuing to take partial profits on tactical trades that were initiated near the April lows.

Out of an abundance of caution, our Protection Band is being raised.

U.S. Downgraded

Please click here for an enlarged chart of iShares 20+ Year Treasury Bond ETF TLT.

Note the following:

• The chart shows Treasuries were almost out of the danger zone marked on the chart.
• The chart shows Treasuries have fallen below the danger zone on Moody's downgrading U.S. debt.
• The chart shows Treasuries are now in zone 4 (support).
• The chart shows Treasuries have not been this low since Fall 2023.
• Here is a historical perspective of what happened when Standard & Poor's downgraded U.S. debt in August 2011.
  • The next trading session S&P 500 fell 6.7%, and the Dow Jones Industrial Average fell 5.6%.
  • Over the following weeks, the market experienced heightened volatility with consecutive days with 4+% swings in either direction.
  • The stock market dropped more than 20%, technically entering a bear market for a short period.
  • By December 31, 2011, the market ended the year roughly flat.
• In our analysis, the impact of the downgrade is likely to be muted and very different from 2011 for the following reasons:  
  • Moody's is simply 14 years too late.  Based on the data, Moody's should have downgraded U.S. debt in 2011. 
  • There is no new information in Moody's downgrade.
  • In 2011, the S&P 500 downgrade was a shock.  Now, there is nothing new here.
  • Stock market bulls are pinning their hopes on President Trump's "big beautiful bill."  The House Budget Committee advanced the reconciliation bill.  The bill includes both tax cuts and spending cuts and a debt ceiling increase.  The House will likely vote later this week.  
  • The momo crowd is now more powerful than ever.  The momo crowd does not do any analysis and does not take risk into account.  The momo crowd simply buys every stock market dip on hopium.  
• In the early trade, true to its pattern, the momo crowd is aggressively buying stocks, taking advantage of about a 1% dip in the stock market on the downgrade.
• Prudent investors should pay attention to the latest University of Michigan data.  Here are the key points:
  • Consumer sentiment fell to 50.8 vs. 55 consensus.  As a reference, at the same time last year, the index was at 69.1.
  • Inflation expectations for the year ahead increased from 6.5% to 7.3%.
• In our analysis, this particular set of data on consumer sentiment is flawed because it was before President Trump gave China the greatest deal ever.  President Trump's action has reduced consumer anxiety about tariffs in the short term.  
• Leading Indicators were released today at 10am ET.

Magnificent Seven Money Flows

In the early trade, money flows are negative in Apple Inc (AAPL), Amazon.com, Inc. (AMZN), Alphabet Inc Class C (GOOG), Meta Platforms Inc (META), Microsoft Corp (MSFT), NVIDIA Corp (NVDA), and Tesla Inc (TSLA).

In the early trade, money flows are negative in SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust Series 1 (QQQ).

Momo Crowd And Smart Money In Stocks

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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 has been very volatile after the U.S. downgrade.  The Senate is likely to pass the stablecoin bill.  This will be the first big legislative win for the crypto industry after President Trump's re-election.  

Arora Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.  Our proprietary Protection Band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.

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.

The Arora Report is known for its accurate calls. The Arora Report correctly called the big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, 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. Please click here to sign up for a free forever Generate Wealth Newsletter.