Tariffs Will Provide Great Buying Opportunity In Long Term – Investors Must First Cross Stagflation Chasm

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

Great Buying Opportunity Ahead

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

Note the following:

• The chart shows the stock market has barely broken below the low band of support zone 1.   If the stock market continues lower, support zone 1 will become a resistance zone.
• The chart shows a positive RSI divergence.  This indicates the internal momentum of the stock market is not as negative as the price indicates.  This is a positive.
• On April 1, we shared with readers:
• In our analysis, how the market behaves after Trump’s reveal will come down to the difference between expectations about tariffs that are built into the market and what Trump reveals.
  • If the tariffs Trump reveals are less onerous than market expectations, the stock market will go up.
  • If the tariffs Trump reveals are more onerous than market expectations, the stock market will go down.

• The tariffs President Trump imposed are worse than market expectations.
• In our analysis, the tariffs President Trump imposed may raise about $700B.  Market expectations were for $200B – $300B.  
• In our analysis, these tariffs, if sustained, will provide a great buying opportunity in the long term, but first, investors must cross the stagflation chasm.  
• Investors should think in terms of four separate buckets:
  • Long term strategic positions
  • Tactical positions
  • Hedges
  • Short term trades
• It is not appropriate to start any strategic positions at this time from the long side.  Tentatively, if the stock market reaches support zone 2 shown on the chart, that may be a time to start thinking about strategic positions.  The ideal time to start strategic positions will be if the stock market goes into support zone 3 shown on the chart.
• Will the stock market go to support zones 2 and 3?  This will depend on President Trump and the Fed.  Here are the two key questions:
  • Now that President Trump has taken the big step of imposing tariffs, will he have the nerve to sustain them?
  • Will the Fed have the spine to do the right thing by not significantly lowering interest rates.
• In The our analysis, in the longer term, if these tariffs are sustained and other countries retaliate, stagflation will likely take hold and the stock market will go lower.  If capitulation occurs, from a longer term perspective, that will be a buying opportunity for strategic positions.  
• Our portfolios are well situated based on 360 degree analysis using the adaptive ZYX Asset Allocation Model with inputs in ten categories.  As full disclosure, many individual positions are hedged.  Here is a great example
  • The latest increase in hedges on Apple Inc (AAPL) were on February 5 and March 4. On March 4, we wrote:
  • “In Trump’s first administration, Apple was able to get a carve out for China tariffs.  As of this writing, it appears that there is no carve out for Apple at this time.”
  • Apple has been trying to diversify its manufacturing outside China in India and Vietnam.  This has not turned out for Apple as it had imagined – tariffs are 54% on China, 46% on Vietnam, and 26% on India.  In our analysis, the impact of tariffs on Apple will be over $30B.  If Apple decides to raise prices by about $10B and takes a $20B hit, Apple earnings will be cut by about 15%.

• At the high end, the protection band protects up to 50% of long term portfolios.  As of today, the protection band is not being raised for five reasons:
  • It is not known how the Fed will react.  If the Fed decides to make an emergency rate cut, the stock market may rally.  In The our analysis, such a move on the Fed’s part would be very unwise and add to stagflationary pressures, instead of relieving them.  If the Fed cuts rates and there is a rally, the tentative plan is to use the rally to add to the protection band.  
  • Prudent investors should pay attention to Treasury Secretary Bessent’s statement that the tariffs are the “high water mark” unless other countries retaliate.  Bessent is taking a “wait and see” approach.  In our analysis, investors should ignore the rhetoric coming out of other countries and instead look at the meat of what other countries do.  For example, to date, China has had very strong rhetoric, but the meat of China’s response has been very weak.  Protection band changes will depend on the response from other countries.
  • Momo gurus are urging their followers to buy the dip.  If the momo crowd buys and smart money does not sell, there is potential for a bounce.  The potential for a bounce cannot be ignored.
  • President Trump’s tax cuts, large cost reduction, and deregulation are ahead.  All three of these will be positive and may cause sharp rallies.
  • Positive RSI divergence shown on the chart.
• Initial jobless claims came at 219K vs. 224K consensus. Today, this data is being overshadowed by tariffs.
• ISM Services Index will be released at 10am ET and may be market moving.
• The jobs report, known as the mother of all numbers, will be released tomorrow at 8:30am ET.

Magnificent Seven Money Flows

In the early trade, money flows are negative in AAPL, Amazon.com, Inc. (AMZN), Alphabet Inc Class C (GOOG), Meta Platforms Inc (META), Microsoft Corp (MSFT), NVIDIA Corp (NVDA), and Tesla Inc (TSLA).

In the early trade, money flows are negative in S&P 500 ETF (SPY) and Invesco QQQ Trust Series 1 (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 is range bound.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.  Our proprietary protection band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.

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.