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

Risk To AI Trade

Please click here for a chart of Roundhill Magnificent Seven ETF (BATS:MAGS) and SPDR S&P 500 ETF Trust (NYSE:SPY) which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

• The chart compares the Magnificent Seven ETF (MAGS) to SPY.
• The chart shows that MAGS is lagging SPY.
• The chart shows that during the November stock market dip, MAGS had significant underperformance compared to SPY.  This illustrates the newly developing risk in Mag 7 stocks.
• Performance of Mag 7 would have been much worse than shown on the chart if it were not for about a trillion dollar value added to Alphabet Inc Class A (NASDAQ:GOOGL) on exuberance about TPU.  There are several misconceptions amongst investors about Google's TPU.
• At a time when most portfolios are heavily overweighted in Mag 7, there are two general beliefs amongst investors:
  • Mag 7 are the safest stocks.
  • Mag 7 stocks will continue to rise at the same pace in the future as they have risen in the recent past.
• It is important for investors to get ahead of the curve.  The chart shows the cracks are beginning to appear. History shows that there have been numerous times when investors had a belief in a group of stocks, as they do now in Mag 7; every time the favored group of stocks ultimately faltered, investors did not change their beliefs in time and ended up with major losses.
• At this time, it is especially important to properly diversify your portfolio.
• All investors should consider having a systematic protection mechanism in place.
• In addition to the Fed decision, this week’s earnings from Oracle Corp (NYSE:ORCL) after close on December 10th and Broadcom Inc (NASDAQ:AVGO) on December 11th will determine the near term course of the AI trade.  ORCL has a $350B deal with OpenAI.  Unless OpenAI is able to come up with a new version of ChatGPT that surpasses Google's Gemini 3, ORCL may have to scale back capex spend on data centers.  Of note is that ORCL is borrowing heavily to build these data centers.  As a result, ORCL has gone from a conservative stock to a risky stock.  There are rumors that OpenAI is close to a new version of ChatGPT that may be better than Gemini 3.  AVGO is Google's partner for TPUs, challenging NVIDIA Corp (NASDAQ:NVDA).
• In the early trade momo crowd is buying stocks aggressively on rate cut hopes ahead of the FOMC meeting.
• The chart shows that this market is very sensitive to interest rates.
  • The chart shows a drop in Mag 7 stocks and SPY in November when the probability of a rate cut fell to 30%.
  • The chart shows that Mag 7 stocks and the market started surging back when New York Fed Governor John Williams said that he was in favor of a rate cut in December.  The odds of a rate cut quickly jumped from 30% to 70% in a day, driving the stock market higher.

China Beats Tariffs

In a historic first for any country ever, China's trade surplus reached $1.08T for the first 11 months of this year.  China achieved this historic milestone in the face of significant tariffs from the US.  Just imagine what China could have accomplished if large tariffs from the US were not in place.

The historical record demonstrates China's dominance in manufacturing and its global reach.  China redirected exports that would have gone to the US to other parts of the world.  This year, China's exports to Africa have risen by 26%, to Southeast Asia by 14%, and to Latin America by 7.1%.

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 neutral in Amazon.com, Inc. (NASDAQ:AMZN), Nvidia (NVDA), Microsoft Corp (NASDAQ:MSFT), Alphabet Inc Class C (NASDAQ:GOOG), and Apple Inc (NASDAQ:AAPL).

In the early trade, money flows are negative in Tesla Inc (NASDAQ:TSLA) and Meta Platforms Inc (NASDAQ:META). 

In the early trade, money flows are positive in S&P 500 ETF (SPY) and in 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 (USO).

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.

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.