Four events are sending investors out of stocks and into the safety of gold, bonds and the Japanese yen.
How do I know this? I am looking at money flows.
The market reaction to Brexit and the Trump election is more than ample proof that investors do not come out ahead just by analyzing events and making predictions based on the prevailing wisdom. As an example, the prevailing wisdom was that if Trump got elected, the stock market would plunge. Initially, Dow Jones Industrial Average futures did plunge 700 points, and since then the market has staged an impressive rally.
A useful gauge is money flows. Due to the importance of money flows to investors, let us explore it before delving into the four important events.
Please click here for tables of important money flows. I have been watching and investing based on money flows for a very long time. Long ago I concluded that investing and trading on money flows alone did not give me the edge I was seeking. That led to the multi-year quest of developing algorithms to dissect money flows into various segments. Money flows from the following three segments are the most important.
• Smart money
• “Momo” (momentum) crowd
• Short squeeze
The tables linked above show current money flows for each of these three segments for stocks, gold, oil and bonds.
Now that you have been exposed to a better way of looking at money flows, you too can appreciate the impact of the four events with a new perspective that is likely to generate more profits and fewer losses. Here are the four events:
Qatar is a small, but strategically located, Arab nation. It is different from most of the Arab population in that the majority of its citizens follow the Salafi branch within Sunni Islam. It has close relations with Iran.
The news is that Saudi Arabia, Bahrain, UAE and Egypt have cut off diplomatic relations with Qatar. They claim Qatar is supporting terrorism.
The news started an avalanche of buying in gold from the Middle East. ETFs of interest are gold ETF GLD, -0.11% silver ETF SLV, +0.00% gold miner ETF GDX, -0.38% and junior gold miner ETF GDXJ, +0.09% Day traders are having a heyday with leveraged miner ETF NUGT, -1.39%
Qatar itself is not a major oil exporter but is a big exporter of liquefied natural gas. Brent crude oil, the standard in Europe, initially moved up on the news.
WTI crude CLN7, -0.91% the standard in the United States, did not initially see as much buying as Brent did. When the buying did not continue, bears took charge with waves of aggressive selling, attempting to break support at $47. Every time the support broke, significant buying came in right under $47. This price action is leading to a short squeeze in oil as of this writing.
ETFs of interest are oil ETF USO, -1.20% major oil equities ETF XLE, -0.17% oil-services equities ETF OIH, -0.49% and oil-exploration ETF XOP, -0.61% Day traders are using leveraged oil ETFs DWT, +3.73% and UWT, -3.47%
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
Comey testimony on Thursday
Fired FBI Director James Comey will testify in front of Congress on Thursday. There is no telling exactly what he will say and how his testimony will affect Trump’s agenda.
ECB meeting on Thursday
The European Central Bank (ECB) meets Thursday. There is considerable uncertainty about the outcome. ETFs of interest are euro ETF FXE, -0.16% inverse euro ETF EUO, +0.32% Vanguard Europe ETF VGK, +0.10% iShares MSCI Eurozone ETF EZU, +0.27% SPDR Euro STOXX 50 ETF FEZ, +0.29% and WisdomTree Europe Hedged Equity Fund HEDJ, +0.46%
British election on Thursday
Polls have narrowed going into the British election Thursday. This is causing considerable nervousness in international markets. Money is flowing into Treasury bonds and the Japanese currency. Bond ETFs of interest are TLT, -0.23% and TBT, +0.31% Yen ETFs of interest are FXY, -0.06% and YCS, +0.23%
What to do now
The following is the current call from the morning capsule provided every morning to The Arora Report subscribers:
“It is important for investors to look ahead and not in the rearview mirror. Consider continuing to hold existing positions. Based on individual risk preference, consider holding cash or Treasury bills 18%-28%, short- to medium-term hedges of 15%-25% and very short-term hedges of 15%. It is worth remembering 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.”
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.