The Carry Trade Chickens May Be Coming Home to Roost

The Bank of Japan just did something it hasn't done in nearly 30 years, and tech investors might want to pay attention. BOJ raised its key interest rate to 0.75% from 0.5%, marking the highest rate since 1995. Governor Ueda is hinting that more hikes could be on the way, and the 10-year Japanese Government Bond has climbed above 2%.

Why does this matter if you're sitting in Silicon Valley? Because for years, the Japan carry trade has been one of the market's worst-kept secrets. Funds have been borrowing money at rock-bottom Japanese rates and pouring it into U.S. AI stocks. These funds are highly leveraged, which means even small rate increases in Japan create pressure to unwind positions. If BOJ keeps raising rates, expect these funds to reduce borrowings and sell some of their AI holdings. The impact often comes with a significant delay, so don't expect immediate fireworks.

After years of deflation keeping Japanese interest rates near zero, inflation is now taking hold at around 3% in Japan. But here's the twist: BOJ will also have to contend with an economy that's losing momentum, making it harder to raise rates significantly without causing other problems.

Tech Stocks at a Critical Juncture

Looking at the Invesco QQQ Trust (QQQ), tech stocks are back at the top band of resistance. The positive news is that QQQ didn't dip to the lower half of zone one before bouncing. After today, liquidity will drop dramatically, and you can bet the momentum crowd will use that thin trading to push their followers toward aggressive tech stock buying. They're already making very bullish projections for 2026.

Here's what prudent investors need to understand: momentum gurus are like a one-way street. They're perma-bulls, always bullish regardless of conditions. The tech stocks showing strength now have real potential to be impacted negatively by the BOJ rate hike, even if the effects take time to materialize.

That Inflation Data? Yeah, It's Probably Wrong

About yesterday's CPI data that sparked the rally: the inflation numbers released by the U.S. government are flawed. Due to the government shutdown, officials couldn't gather some data and had to impute numbers instead. Translation: they made educated guesses. In all likelihood, actual inflation was higher than the released data showed.

At any other time of year, the realization that CPI data was compromised would negatively impact the stock market. But today? The market is focused on positive seasonality ahead, conveniently ignoring that yesterday's rally was built on questionable numbers. New York Fed President John Williams says he doesn't see a "sense of urgency" to cut rates, though he eventually sees rates lower than current levels.

Oracle Gets a TikTok Lifeline

Oracle Corp (ORCL) stock has been under pressure lately due to plans for heavy borrowing to build data centers. This morning, Oracle is jumping on news that TikTok owner ByteDance has formed a new joint venture for its U.S. business, with Oracle as a part owner. The joint venture will handle data protection, algorithmic security, content moderation, and software assurance. It's a nice break for a company that needed some good news.

Earnings Tell Two Stories

Nike Inc (NKE) reported earnings better than consensus, and its U.S. business is doing well. But the stock is tumbling because of headwinds in China. It's a reminder that even strong domestic performance can't overcome weakness in major markets.

FedEx Corp (FDX) reported earnings better than consensus but worse than whisper numbers. Prudent investors pay attention to FedEx earnings because they're an important indication of the economy. When the package delivery business slows, it usually means something about consumer and business spending.

Triple Witching and Seasonality

Today is triple witching, when stock futures, stock index options, and stock options all expire. Triple witching often leads to volatility, so buckle up.

Positive seasonality is driving large money flows into U.S. stocks. If history is a guide, smart money buying now will exit these positions by year-end. The momentum crowd will continue to hold, likely riding positions lower into the new year.

Magnificent Seven Money Flow Watch

Most portfolios are now heavily concentrated in the Mag 7 stocks, making daily money flow monitoring critical. In early trading, money flows are positive in Amazon.com, Inc. (AMZN), Microsoft Corp (MSFT), NVIDIA Corp (NVDA), and Tesla Inc (TSLA).

Money flows are neutral in Alphabet Inc Class C (GOOG) and Meta Platforms Inc (META).

Money flows are negative in Apple Inc (AAPL).

In broader market ETFs, money flows are neutral in SPDR S&P 500 ETF Trust (SPY) and positive in Nasdaq 100 ETF (QQQ).

Bitcoin Holds Steady

Bitcoin (BTC) is range bound, neither breaking out nor breaking down in the current environment.

What Should Investors Do Now?

Consider continuing to hold good, very long-term existing positions. Based on individual risk preference, consider a protection band consisting of cash, Treasury bills, or short-term tactical trades, along with short to medium-term hedges. This approach lets you protect capital while still participating in upside moves.

You can determine your protection bands by adding cash to hedges. The high band of protection is appropriate for older or conservative investors. The low band is appropriate for younger or aggressive investors. If you don't hedge, total cash levels should be higher than stated but significantly less than cash plus hedges combined.

A protection band of 0% would be very bullish, indicating full investment with zero cash. A protection band of 100% would be very bearish, indicating aggressive protection with cash and hedges or aggressive short selling.

It's worth remembering that you cannot take advantage of new upcoming opportunities if you're not holding enough cash. When adjusting hedge levels, consider using partial stop quantities for individual stock positions (non-ETF), wider stops on remaining quantities, and allowing more room for high beta stocks that move more than the market.

The Traditional 60/40 Portfolio Question

Probability-based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

Those who want to stick to the traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high-quality bonds with five-year duration or less. Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions rather than strategic positions at this time.

The release of PCE and personal income and spending data has been delayed, removing another data point from an already murky picture.