Unstable Structures

Please click here for an enlarged chart of silver futures (SI_F).

Note the following:

• The chart shows a 41% drop in silver futures in less than three days.
•  The drop occurred when exchanges across the globe raised margin requirements and the momo crowd could not meet the new margin requirements.  This led to forced liquidation of many momo crowd accounts.
• In our analysis, prior to the drop, the price of an average momo account on silver was around $105.  The chart shows silver fell under $72.  We are long silver from an average of $13.96 and gave a signal to take partial profits on silver when silver futures were trading at $114.
• In our analysis, the price of an average momo account on gold is about $4800.  Gold futures have traded as low as $4407.  We are long gold from an average of $1103 and gave a signal to take partial profits on gold when gold futures were trading at $5111.
• Momo gurus, who until recently never touched gold or silver but ignited the silver rally with conspiracy theories and rumors, are back in force urging their followers who still have money left to buy gold and silver.  In the early trade, there is aggressive momo crowd buying in SPDR Gold Trust (NYSE:GLD) and iShares Silver Trust (NYSE:SLV).
• Over the weekend, bitcoin fell below the psychologically important level of $80,000 and then traded under $75,000.   A critical level for bitcoin is $76,038.  This is the average price of bitcoins held by Michael Saylor's company Strategy Inc Class A (NASDAQ:MSTR).  Strategy owns 712,647 Bitcoin (CRYPTO: BTC).  The proximate reason for the fall in bitcoin is margin calls and forced liquidation of momo crowd accounts.
• In the early trade, the carnage in gold, silver, and bitcoin is spilling over to the momo crowd's favorite tech stocks.  Many momo crowd accounts are being forced to sell their favorite stocks to meet margin calls.
• In our analysis, investors who want to buy the dip as well as those who want to short sell here need to be extremely careful.  The reason is market maker positions now have negative gamma.   In plain English this means when silver, gold, or the momo crowd's favorite tech stocks start going up, market makers will be forced to buy.  Conversely, if silver, gold, or the momo crowd's favorite tech stocks start going down, market makers will be forced to sell.  All of the foregoing combines to form unstable structures in gold, silver, bitcoin, and stocks. Certainly, with the benefit of hindsight, if markets move up from here, many will say they should have bought.  Conversely, if markets drop from here many will say they should have short sold.  Prudent investors need to keep in mind that you cannot trade based on hindsight.  When the market structures are so unstable, the risk is very high in buying or short selling.  It is best to stand aside unless there is a special situation.  
• Due to its massive commitment to OpenAI, Oracle Corp (NYSE:ORCL) has turned from an attractive AI investment into a high-risk/reward investment.  There has been a question as to how Oracle is going to finance all of the spending it has committed to support OpenAI's business.  Now, we know the answer.  Oracle is planning a large debt and stock offering.

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 negative in Apple Inc (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc Class C (NASDAQ:GOOG), Meta Platforms Inc (NASDAQ:META), Microsoft Corp (NASDAQ:MSFT), NVIDIA Corp (NASDAQ:NVDA), and Tesla Inc (NASDAQ:TSLA).

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

Oil

President Trump says the U.S. is in talks with Iran. This is pressuring oil.

Bitcoin

Bitcoin (BTC) is seeing selling.

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.

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.

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.

• No comments yet. Be the first to comment!