Increasing Cash Reserves and Hedging Strategies: Key Insights Preceding Trump's Speech

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

Raising Cash and Hedges

It's time to consider raising cash and implementing hedging strategies. For more guidance, see the section below labeled "Protection Band and What to Do Now." There are several key factors prompting this advice, including recent ISM data and President Trump's commitment to tariffs.

Be aware that this stance could change swiftly if:

• President Trump reverses his decision on tariffs.
• The Federal Reserve signals an intent to cut interest rates rapidly.

Whether to make adjustments now or wait until after Trump's speech is ultimately a personal choice.

Importance of the Support Zone

For a detailed view, please refer to an enlarged chart of the SPDR S&P 500 ETF Trust (SPY), which tracks the S&P 500 (.SPX).

Here's what the chart indicates:

• The stock market has dipped below its previous breakout line.
• A support zone has been established.
• Unless there is a change in stance from President Trump or the Fed, the stock market heading toward this support zone seems most likely.
• The RSI indicates that the market is currently oversold, which typically results in a bounce.
• President Trump is set to address Congress tonight at 9 PM ET, likely discussing topics such as the Russia-Ukraine conflict, inflation, tariffs, and immigration issues.
• Traditionally, presidential speeches before Congress tend to uplift market sentiment. Trump's statement, "I WILL TELL IT LIKE IT IS!", adds uncertainty about how his words will affect the markets.
• Another factor to watch is the earnings report from Target Corp (TGT). Although Target exceeded earnings expectations and reported revenues in line, guidance indicated revenues were below consensus, leading to mixed comments from CEO Brian Cornell regarding consumer sentiment and anticipatory price increases due to tariffs.
• Some investors, labelled as momo gurus, have been overly optimistic about tariffs being a negotiation tactic and consequently predicted they wouldn't be implemented. History has shown that such outlooks can often be misguided. These gurus typically aim to promote ongoing investments in stocks regardless of market conditions.
• Be cautious as momo gurus often pivot their narratives when initial conclusions are proven wrong, now suggesting tariffs will be temporary. This leads to Arora's Second Law of Investing: "No one can predict with certainty what will happen next in the markets." Especially regarding tariffs on China, which has been strategically retaliatory, focusing on impacting Trump's core support.

Current Money Flows in Key Stocks

In preliminary trading, money flows are neutral regarding Apple Inc (AAPL) and Alphabet Inc Class C (GOOG). However, flows are negative for Amazon.com, Inc. (AMZN), NVIDIA Corp (NVDA), Microsoft Corp (MSFT), Meta Platforms Inc (META), and Tesla Inc (TSLA).

Moreover, early trading data shows negative flows for both S&P 500 ETF (SPY) and Invesco QQQ Trust Series 1 (QQQ).

Differences Between Momo Crowd and Smart Investors

To gain an edge, it’s crucial to monitor money flows in SPY and QQQ closely. Understanding when informed investors (smart money) are moving into stocks, gold, and oil can provide valuable insights. Notably, popular ETFs for gold, silver, and oil include SPDR Gold Trust (GLD), iShares Silver Trust (SLV), and United States Oil ETF (USO).

Bitcoin Trends

Much of Bitcoin's rise following Trump's announcement of a strategic crypto reserve has diminished, leading to increased selling pressure on the cryptocurrency.

Protection Bands and Current Recommendations

Looking ahead rather than dwelling on past trends is essential for investors. The proprietary protection band developed from comprehensive data and analysis helps to create actionable insights for investors.

Consider maintaining solid, long-term investment positions while also evaluating your level of cash and hedges. Depending on your risk tolerance, a protection band could consist of cash or Treasury bills paired with tactical trades, along with short- to medium-term hedges.

To develop your protection bands, think about mixing cash with hedges. For older investors or those with more conservative profiles, a higher protection band is advisable. Conversely, younger or more aggressive investors may choose a lower band. If you opt not to hedge, ensure your total cash level exceeds the stated amounts while remaining lower than the combined figure of cash plus hedges.

A 0% protection band indicates a bullish stance with full investment, while a 100% band suggests a bearish approach needing aggressive protection through cash and hedges.

It’s crucial to have adequate cash reserves to seize new investment opportunities, especially when adjusting hedges. When making these changes, consider modifying stop quantities for individual stock positions, employing wider stops on remaining holdings, and adjusting for high-beta stocks—those that have greater movements than the market average.

Rethinking the Traditional 60/40 Portfolio

The current risk-reward profile, which factors in inflation, does not favor long-term bonds. Those sticking with a traditional allocation of 60% stocks and 40% bonds should focus on high-quality bonds with a five-year maturity or less. For those willing to take a more nuanced approach, using bond ETFs tactically rather than strategically is advised at this time.

This analysis has proven reliable, accurately predicting various market movements including the AI rally, the bull market of 2023, and several critical market phases in prior years. For ongoing insights, consider subscribing to a financial newsletter for valuable market perspectives.

cash, hedges, stocks, protection, market