RELIEF RALLY ON FED’S FAVORITE INFLATION DATA, AI EARNINGS EXPECTATIONS OVERDONE

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By Nigam Arora & Dr. Natasha Arora

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

Relief Rally

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

Note the following:

  • The chart shows that the stock market has fallen into the support zone.
  • The chart shows that RSI had approached the oversold level prior to release of PCE data.  PCE is the Fed’s favorite inflation gauge.   RSI foreshadowed that there would be a relief rally if PCE came inline with expectations.
  • The chart shows that the stock market is rallying, exactly as foreshadowed by RSI.
  • Here are the details of PCE:
    • Headline PCE came at 0.3% vs. 0.3% consensus.
    • Core PCE came at 0.2% vs. 0.3% consensus.
  • The U.S. economy is 70% consumer based.  Therefore, prudent investors pay attention to personal income and spending.  The latest data shows that spending is deteriorating in spite of rising income. Here are the details:
    • Personal spending came at 0.2% vs. 0.3% consensus.
    • Person income came at 0.3% vs. 0.3% consensus.
  • Bonds are also experiencing a relief rally on PCE.  Yields are pulling back.
  • There has been a lot of Fed speak:
    • Williams said that progress on inflation is slow but the Fed does not need inflation to be at exactly 2%.
    • Bostic said that inflation will come down very slowly.
    • Goolsbee said that it is important that the Fed hits its 2% target.
    • Logan said that the progress to 2% is bumpy.  She added that the monetary policy may not be as restrictive as thought.
  • There are two important AI related pieces of news.
    • The U.S. government is restricting sales of AI chips from Nvidia (NVDA) and AMD (AMD) to the Middle East.  The fear is that from the Middle East, these chips will be diverted to China.
    • Dell (DELL) stock is falling 17% as of this writing in the premarket.  Dell reported earnings in line with consensus but worse than whisper numbers.  The negative reaction to Dell’s good earnings is an indication that for many stocks, momo crowd expectations are running much higher than reality on AI frenzy.
  • As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.   Please scroll down to see the protection band. The protection band is one of the large number of unique edges that are available to members of The Arora Report.
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Europe

The expectation is that the European Central Bank (ECB) is about to cut interest rates.

Eurozone flash May CPI came at 0.2% vs. 0.2% consensus.

China

The latest data shows that manufacturing in China is slowing.  This has implications for the U.S. stock market.  Here is the latest data:

  • Manufacturing PMI came at 49.5 vs. 50.4 consensus.
  • Non-Manufacturing PMI came at 51.1 vs. 51.5 consensus.

Magnificent Seven Money Flows

In the early trade, money flows are positive in NVDA, Microsoft (MSFT), Alphabet (GOOG), Meta (META), Tesla (TSLA), and Apple (AAPL).

In the early trade, money flows are neutral in Amazon (AMZN).

In the early trade, money flows are positive in S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ).

Momo Crowd And Smart Money In Stocks

The momo crowd is *** (To see the locked content, please take a 30 day free trial) stocks in the early trade.  Smart money is *** in the early trade.

Note for new members: Smart money often sells into the strength generated by momo crowd buying and buys into the weakness generated by momo crowd selling.  Over a long period of time, investors come out ahead by adopting smart money’s ways.  The exception is in a raging bull market – for very short term trades, consider following the momo crowd and not smart money.

Gold

The momo crowd is *** gold in the early trade.  Smart money is *** in the early trade.

For longer-term, please see gold and silver ratings.

Oil

OPEC+ is contemplating some oil production cuts that are scheduled to expire in 2024 with the intention of extending them to 2025.

The momo crowd is *** oil in the early trade.  Smart money is *** in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin (BTC.USD) is also experiencing a mild relief rally on PCE data not coming worse than expected.

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Markets

Our very, very short-term early stock market indicator is ***.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Interest rates are ticking down, and bonds are ticking down.

The dollar is weaker.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

Gold futures are at $2378, silver futures are at $31.87, and oil futures are at $78.30.

S&P 500 futures are trading at 5268 as of this writing.  S&P 500 futures resistance levels are 5400, 5500, and 5622 : support levels are 5256, 5210, and 5020.

DJIA futures are up 83 points.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding *** in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of ***, and short term hedges of ***. 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.

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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 seven 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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Picture of Nigam Arora

Nigam Arora

Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.

Picture of Dr. Natasha Arora

Dr. Natasha Arora

Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.

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