BLIND FAITH IN THE FED CAUSING BIG MOVES IN THE MARKETS – DON’T FALL FOR IT

By Nigam Arora & Dr. Natasha Arora

Weekly Digest from The Arora Report is popular among serious investors and money managers because they have found studying insights from the prior week gives them an edge over the coming weeks. Here is the day by day rundown from the morning capsules made available every morning before the market open in the Real Time Feeds to the paying subscribers of The Arora Report

Please scroll down for the section ‘Protection Bands and What To Do Now.’

BLIND FAITH IN THE FED CAUSING BIG MOVES IN THE MARKETS – DON’T FALL FOR IT

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

Don’t Fall For It

Please click here for a chart of the Treasury yield curve.

Note the following:

  • The chart shows the difference between 10- year Treasury constant maturity yield minus two-year constant maturity yield.
  • The chart shows a significant drop.
  • The drop is causing many money managers and hedge funds to scramble to change their portfolios. Fortunately for The Arora Report subscribers, we analyze various scenarios in advance and optimize the Model Portfolios in advance for a range of scenarios. The scenario that is unfolding is a scenario that The Arora Report modeled in advance. As a result, you do not need to scramble and do not need to make any changes to your portfolios at this time provided you have been closely following The Arora Report.
  • The drop is contrary to what should be happening as the economy opens.
  • There are several reasons for the drop. One big reason is a short squeeze in 10-year bonds. The bigger reason is that a large segment of the investor class has blind faith in the Fed. This is not surprising since the Fed has flooded the economy with money printing and artificially low interest rates. This money has flowed into stocks and real estate.
  • From the recent Fed meeting and Powell press conference:
    • The Fed acknowledged that they were wrong about the economy.
    • The Fed acknowledged that they may be wrong about inflation being transitory.
    • The Fed acknowledged that they were wrong about the amount of inflation.
    • The Fed was not able to put forward any hard data-based reasons to justify the Fed continuing the policies that were put in place when the country was in lockdown and there was no vaccine.
  • Given the foregoing, expectations from smart money were that the investor class would become more skeptical of the Fed’s policies.  Instead, as the chart shows, the reverse has happened – investors have shrugged off the facts; the investors are buying momo stocks, meme stocks, speculative stocks, and stay-at-home stocks.  Investors are selling economy opening stocks such as banks, energy, commodities, and industrials.
  • Prudent investors should not fall for blind faith in the Fed – carefully study the history – the Fed has often been wrong and those with blind faith in the Fed ultimately tend to get burned.

Quadruple Witching

Today is quadruple witching.  In quadruple witching, stock index futures, futures options, stock options, and single stock futures expire.

Quadruple witching may increase volatility.

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 🔒 stocks in the early trade.

Gold

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

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

Oil

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

For longer-term, please see oil ratings.

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 and bonds are range-bound.

The dollar is stronger.

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 $1,777, silver futures are at $26.11, and oil futures are $70.30.

S&P 500 futures resistance levels are 4200, 4318, and 4400: support levels are 4000, 3950, and 3860.

DJIA futures are down 274 points.

Protection Bands and What To Do Now?

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

Consider continuing to hold existing positions. Based on individual risk preference, on dips, consider holding 🔒 in cash or treasury bills or short-term bond funds 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, total cash level should be more than stated above but significantly less than cash plus hedges.

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.

PAY ATTENTION IF YOU ARE USING GOOGLE READER, FEEDLY, MICROSOFT NEWS, FLIPBOARD OR OTHER RSS READERS

‘TALKING ABOUT TALKING ABOUT’ IS PROGRESS BUT NOT ENOUGH

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

Talking About Talking About

Please click here for a chart of    Nasdaq 100 ETF ().

Note the following:

  • In yesterday’s Afternoon Capsule we wrote,

Now the Fed is changing its tune and moving to what we have been saying, a few months late but it is better to be late than never.

We are commending the Fed for giving up the intransigence but still, the Fed plans to move much slower than what is warranted by the data.

  • It is good that the Fed is now ‘talking about talking about’ tapering and raising rates down the road.  However, in our analysis, the Fed is too slow in view of the economic data.
  • The Fed has now acknowledged that there is a potential for them being wrong about the inflation being transitory.
  • The Fed has now acknowledged that they have been wrong about the economy.
  • The Fed is taking unnecessary risk of causing huge problems for the U. S. economy down the road by not reducing money printing now.  Money printing at the rate of $120 billion per month – a policy that was put in place right after COVID started and the country was locked down – makes no sense now in the face of a rip-roaring economy.   The Fed should have stopped money printing back when it became known that vaccines would be effective.
  • The chart shows that  pulled back from the resistance line to the breakout line.
  • In traditional technical analysis, the third attempt to breakout is often successful.
  • The chart shows that the third attempt to breakout has temporarily failed.
  • The chart shows that RSI has turned lower.
  • The chart shows that volume was higher during the market drop yesterday after the Fed.
  • Note from the chart that volume is often higher during drops and lower during rallies.   This indicates that there is higher risk in this market than generally believed.
  • Expect the momo crowd and the meme crowd to aggressively buy this dip.

Jobless Claims

Initial Jobless Claims came at 412K vs. 350K consensus.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 stocks in the early trade.  Smart money is 🔒.

Gold

The Fed decision is negative for gold in the very, very short term for the following reasons:

  • Gold is priced in dollars.  The dollar is moving higher on the Fed decision because the Fed changed its tune. As the dollar moves higher, gold goes lower.
  • Gold does not like higher interest rates.  Even though the Fed is not likely to raise interest rates for a long time, ‘talking about talking about’ is bringing selling into gold and silver.

The foregoing is only in the short term.  In the long term, investors need to keep in mind that money printing and excessive borrowing is not likely to be a free lunch.  Investors should look at gold as an insurance policy.

The reason that gold is not at $3,000 is that money has been flowing out of gold and into bitcoin.  Please see updated gold ratings in six different time frames.

The momo crowd is 🔒 gold in the early trade.  Smart money is 🔒If the historical pattern holds true, expect smart money to start buying gold if it falls further.

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

Oil

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

For longer-term, please see oil ratings.

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 and bonds are range-bound.

The dollar is stronger.

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 $1781, silver futures are at $26.37, and oil futures are $71.81.

S&P 500 futures resistance levels are 4200, 4318, and 4400: support levels are 4000, 3950, and 3860.

DJIA futures are down 26 points.

MOMO STOCKS READY TO FLY IF NO HINT OF ‘THINKING ABOUT THINKING’

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

Thinking About Thinking

Please click here for a chart of Nasdaq 100 ETF ().

Note the following:

  • The chart shows a setup for  to go up significantly if there is a trigger.
  • If there is a trigger, momo stocks can easily move up 10 – 15%.
  • Here are the key points ahead of the Fed’s decision.
    • The Fed is almost certainly not changing interest rates.
    • The probability is very high that the Fed will continue its asset purchases or money printing.
    • The market will be looking at dot plot.  The expectation is of a rate hike in 2023.
    • Will the Fed give a hint of ‘thinking about thinking’ about tapering?  This is the key question.
  • If the Fed does not give any hint of a change in the policy, justifies no change in the coming months and the market buys into the justification – this will be the trigger to the upside for the stock market. The reason is that the Fed will be pumping more air into the stock market bubble.
  • If the Fed starts thinking about tapering, there is a high potential of the stock market throwing a taper tantrum.  A taper tantrum can easily lead to a 5 – 15% drop.
  • All investors should be on high alert this afternoon as what the Fed says will override everything else in the markets.

Housing Starts Cool

May Housing Starts came at 1.572M vs. 1.635M consensus.

Building permits came at 1.681M vs. 1.730M consensus.

The data shows that the red hot housing market is cooling down.  However, this data also means that prices will continue to rise because there is not enough new construction to supply the demand.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 stocks in the early trade.  Smart money is 🔒.

Gold

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

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

Oil

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

For longer-term, please see oil ratings.

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 up.

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 $1859, silver futures are at $27.90, and oil futures are $72.43.

S&P 500 futures resistance levels are 4318 and 4400: support levels are 4200, 4000, and 3950.

DJIA futures are down 28 points.

PAY ATTENTION IF YOU ARE USING GOOGLE READER, FEEDLY, MICROSOFT NEWS, FLIPBOARD OR OTHER RSS READERS

NEW HOTTER INFLATION DATA – MOMO BETS FED DOES NOT CARE

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

Hotter Inflation Data

Please click here for a chart of  Nasdaq 100 ETF () new high

Note the following:

  • The chart shows that  has broken out above the line marked resistance.  Resistance is now the support.
  • The chart shows that RSI is now overbought.
  • The chart shows the breakout is on low volume.  This shows a lack of conviction.
  • The Fed meeting starts today.  The Fed will announce its policy decision at 2:00 pm ET tomorrow.
  • Historically, both momo crowd and smart money buy ahead of the Fed announcement.   We will be watching to see if the historical pattern holds in view of the hotter inflation data just released.
  • May Producer Price Index (PPI) came at 0.8% vs. 0.5% consensus.  This is inflation at the producer level running at the rate of 9.6% at a time when the government insists that there is no inflation and any future inflation will be transitory.
  • In our analysis, the way the government measures inflation is flawed.  Actual inflation is running higher than what the government reports.
  • Core PPI  came at 0.7% vs. 0.5% consensus.
  • So far, the momo crowd is betting that the Fed does not care about the hotter inflation data.
  • The momo crowd has a sound basis in their belief as the Fed has been intransigent in recklessly pursuing policies that were put in place before the vaccine, before the economy opening up, and before Biden started recklessly borrowing.

Retail Sales

May Retail Sales came at -1.3% vs. -0.6% consensus.

May Retail Sales Ex-auto came at -0.7% vs. +0.5% consensus.

Investors need to keep in mind that in spite of slight weakness, retail sales are at an all-time high – higher than pre-pandemic.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒stocks in the early trade.  Smart money is 🔒.

Gold

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

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

Oil

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

For longer-term, please see oil ratings.

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 and bonds are range bound.

The dollar is stronger.

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 $1868, silver futures are at $27.82, and oil futures are $71.81.

S&P 500 futures resistance levels are 4318 and 4400: support levels are 4200, 4000, and 3950.

DJIA futures are up 13 points.

FED MEETING AHEAD – MORE AIR PUMPING INTO THE BUBBLE

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

Fed Meeting

Please click here for a chart of the Consumer Price Index (CPI).

Note the following:

  • The chart shows that inflation is rising.
  • The Fed claims that inflation is transitory. The Fed does not define transitory, perhaps on purpose.   Does transitory mean that prices that are rising now will pull back?  Does transitory mean that prices that are rising fast now will continue to rise but at a slower rate?
  • The stock and bond markets have bought lock, stock and barrel into the Fed’s claim.
  • Keep in mind that this is just a hypothesis that the Fed put out.  There is no evidence and there is no precedence.
  • Historically, the Fed has often been wrong at critical junctions especially regarding inflation forecast.  Yet, hardly anyone is asking the question, “What if the Fed is wrong?”
  • The Fed meeting starts tomorrow.  The Fed will announce its policy decision at 2:00 pm ET on Wednesday.  This will be followed by a Powell press conference at 2:30 pm ET.
  • The Fed is likely to continue to buy bonds at the rate of $120 billion per month and continue interest rates at zero.
  • Economists pay attention to the dot plot from the Fed.  The dot plot is indicating an interest rate rise in 2023.
  • The market is anticipating the Fed will continue to pump more air into the stock market bubble.
  • We will be carefully reading the tea leaves.  Even the slightest hint of monetary policy tightening has the potential to cause a selloff.

Meme Stocks

, a maker of computer hardware for gamers, is a newly minted meme stock.  The meme crowd is buying the stock aggressively this morning on the belief that their own buying is big enough to drive  stock to the moon.

Bitcoin

Bitcoin has crossed $40,000 on a comment by Musk.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 stocks in the early trade.  Smart money is🔒.

Gold

Money is again aggressively moving out of gold and into bitcoin as many investors have started believing that the bitcoin drop may be over.

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

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

Oil

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

For longer-term, please see oil ratings.

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 up 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 $1848, silver futures are at $27.62, and oil futures are $71.63.

S&P 500 futures resistance levels are 4318  and 4400: support levels are 4200, 4000, and 3950.

PAY ATTENTION IF YOU ARE USING GOOGLE READER, FEEDLY, MICROSOFT NEWS, FLIPBOARD OR OTHER RSS READERS

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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.

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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