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

Euphoric TACO Traders

Please click here for an enlarged chart of SPDR S&P 500 ETF Trust (NYSE:SPY) which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

• The chart shows the big drop in the stock market on Friday on President Trump threatening to impose 100% additional tariffs on Chinese goods.
• In Friday's Morning Capsule, when S&P 500 was trading at an all time high, we wrote:

In yesterday’s Morning Capsule, we shared with you that China was restricting the export of rare earths to gain leverage in talks with the U.S.  President Trump is considering responding.

• The chart shows we gave a signal to increase our protection band by raising cash and hedges.
• The chart shows aggressive TACO (Trump Always Chickens Out) buying this morning.
• The proprietary VUD indicator is the most sensitive measure of net supply and demand in real-time. The orange represents net supply and the green represents net demand.  The chart shows that on Friday the VUD indicator was orange, but in the early trade this morning, it has flipped to green.
• Over the weekend, President Trump said, "Don't worry about China, it will all be fine! Highly respected President Xi just had a bad moment. He doesn't want Depression for his country, and neither do I. The U.S.A. wants to help China, not hurt it!!! President DJT."
• TACO traders are interpreting President Trump's statement as chickening out and are aggressively buying stocks.  Retail traders are aggressively buying stocks.  Institutions appear to be cautious.
• Euphoric TACO traders are oblivious that the Dutch government is seizing control of Chinese chip maker Nexperia due to a security threat.
• In our analysis, there is a fair probability that President Trump is not chickening out, but seeking a diplomatic path forward.  Further in our analysis, in its bullish euphoria the stock market had assumed that tariffs, trade, and China were not anything to be concerned about; after Friday, at a minimum, prudent investors should not assume TACO traders are 100% right.    
• Today is Columbus Day.  The bond market is closed, and it is a bank holiday.  Lower liquidity is helping the momo crowd to run up the stock market in the early trade.  The Columbus Day holiday started in 1971.  Since then, the stock market has risen between Columbus Day and the end of the year 72% of the years.
• The U.S. Department of War is planning to build an additional $1B stockpile of critical metals.  As full disclosure, this is triggering a short squeeze in three rare earth stocks in the Arora Portfolio.  USA Rare Earth Inc (NASDAQ:USAR) is up 17%, Critical Metals Corp (NASDAQ:CRML) is up 16%, and MP Materials Corp (NYSE:MP) is up 9% as of this writing in the premarket.
• Please see the gold section below regarding the short squeeze in silver.
• Earnings season kicks off with bank earnings in the premarket tomorrow morning from Goldman Sachs Group Inc (NYSE:GS), Citigroup Inc (NYSE:C), JPMorgan Chase & Co (NYSE:JPM), and Wells Fargo & Co (NYSE:WFC).

Japan

Opposition in Japan is in talks to challenge Sanae Takaichi.  This development may temper the fear of excessive fiscal and monetary stimulation in Japan.  Japan is important to investors in the U.S. market because of the carry trade.

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks.  The best way to get an edge, dig below the surface, and rise above the noise of the daily news is to pay attention to early money flows in the Mag 7 stocks on a daily basis.  When there is significant news in the Mag 7 stocks that rises above the threshold of noise and impacts your entire portfolio, it is covered in the main section above.

In the early trade, money flows are positive 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 positive in S&P 500 ETF (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 (NYSE:GLD).  The most popular ETF for silver is iShares Silver Trust (NYSE:SLV).  The most popular ETF for oil is United States Oil ETF (NYSE:USO).

Gold

A vicious short squeeze is taking place in silver in London.  An arbitrage opportunity has developed due to the price difference in silver in London and the U.S. Silver ETF (SLV) is up 2.77% as of this writing.  In our analysis, there is a fair probability that silver ETF SLV may also experience a vicious short squeeze.  

Gold is hitting an all time high with gold futures briefly hitting $4100.  In our analysis, the gold market has a different opinion from TACO traders and the stock market; the gold market is indicating that tensions with China will continue.  

In our analysis, the probability of a short squeeze in gold ETF (NYSE:GLD) is low.  

Oil

Oil has crosscurrents.  On one hand, the release of hostages in Gaza and President Trump talking peace in the Middle East is negative for oil.  On the other hand, President Trump taking a diplomatic path with China is positive for oil.  Oil ETF (USO) is up over 1% as of this writing.

Bitcoin

Bitcoin (CRYPTO: BTC) is seeing buying.

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.

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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.

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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.