Classic Trump Whipsaw
Please click here for an enlarged chart of defense company RTX Corp (NYSE:RTX).
Note the following:
- This article is about the big picture, not an individual stock. The chart of RTX stock is being used to illustrate the point.
- The chart shows a big drop in RTX when President Trump said he would ban defense companies from buy backs and issuing dividends. President Trump singled out RTX as a big offender. Other defense stocks experienced a similar large drop.
- Only two hours later, the chart shows a big spike up in RTX, along with other defense stocks, when President Trump said he wants to build the dream military. President Trump wants to increase the 2027 defense budget from $1T to $1.5T.
- As full disclosure, RTX is in our portfolio. RTX was bought using the strategy of buying on a big dip in a stock due to temporary problems that are fixable. In the case of RTX, the problem was with Pratt & Whitney aircraft engines. RTX was bought at an average price of $80.70. RTX is trading at $192.47 as of this writing in the premarket.
- As full disclosure, for those who prefer ETFs, aerospace and defense ETF iShares US Aerospace & Defense ETF (BATS:ITA) is in our portfolio and has large unrealized gains.
- President Trump wants to pay for the increase in defense spending with tariffs.
- All of the aggressive buying shown on the chart is coming from the momo crowd. In our analysis, prudent investors should do some basic math.
- Tariffs generated $195B in fiscal year 2025.
- The estimates for tariffs from fiscal year 2026 range from $191B to $247B.
- President Trump wants to spend another $500B on defense and pay for it with tariffs.
- President Trump also wants to use tariffs to pay down U.S. debt by perhaps $1T.
- President Trump also wants to send $2000 of free money to each low and middle income American. Estimates of the cost range from $280B – $600B depending upon eligibility criteria.
- The numbers for money coming in and money going out do not add up.
- Also be mindful that tariffs are being challenged in the U.S. Supreme Court. The speculation is the Supreme Court will announce its decision tomorrow. The consensus is the Supreme Court will find a way to support President Trump.
- Prudent investors need to know that companies are already lining up to seek refunds of tariffs they have paid in case the Supreme Court rules against the tariffs.
- European defense stocks are rocketing. As full disclosure, European defense stock ETF Select STOXX Europe Aerospace & Defense ETF (BATS:EUAD) is in our portfolio. The reason behind the move in European defense stocks is President Trump’s threat to use force to take over Greenland.
- A good way to profit from President Trump’s threats to take over Greenland is the stock of rare earth miner Critical Metals Corp (NASDAQ:CRML). CRML has a project in Greenland. As full disclosure, CRML is in our portfolio. CRML should only be bought on pullbacks.
- After a long delay, China has approved purchases on NVIDIA Corp (NASDAQ:NVDA) H200 chips. In an unusual move, Nvidia is demanding full payment upfront and saying the orders will not be able to be cancelled.
- Q3 productivity surged to 4.9% vs. 4.9% consensus.
- Of note is the Q3 labor costs declined 1.9% vs. a consensus of an increase of 0.8%. In our analysis, the surge in productivity and decline in unit labor costs are two excellent pieces of news for the U.S. economy and the stock market. AI is beginning to show its impact in increasing productivity and reducing costs.
- JOLTS job openings released yesterday came at 7.146M vs. 7.449M prior.
- Initially jobless claims came at 208K vs. 217K consensus.
- The official jobs report will be released tomorrow at 8:30am ET.
- ISM Non-Manufacturing Index released yesterday came at 54.4 vs. 52.2 consensus.
- In our analysis of the data, non-manufacturing activity is staying strong but job growth is likely to slow. The Fed may use slowing job growth as an excuse to cut interest rates.
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 Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc Class C (NASDAQ:GOOG), and Nvidia (NVDA).
In the early trade, money flows are negative in Apple Inc (NASDAQ:AAPL), Microsoft Corp (NASDAQ:MSFT), Tesla Inc (NASDAQ:TSLA), and Meta Platforms Inc (NASDAQ:META).
In the early trade, money flows are negative 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
EIA crude inventories had a drop of 3.83M barrels vs. consensus of a drop of 1.33M barrels. The higher than expected drop has brought buying into oil.
Bitcoin
Bitcoin (CRYPTO: 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.
