INVESTORS WAITING FOR CPI BUT CHINA’S PRODUCER DEFLATION MAY BE MORE CONSEQUENTIAL

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By Nigam Arora & Dr. Natasha Arora

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

China’s Producer Deflation

Please click here for a chart of China ETF ASHR.

Note the following:

  • The chart shows that unlike the U.S., the Chinese market has not staged a significant rally this year.  China is important because it is the second largest economy in the world.
  • The stock market rally in the U.S. is driven by the AI frenzy that has caused money to flow into seven magnificent stocks.  The magnificent seven stocks are Apple (AAPL), Amazon (AMZN), Alphabet (GOOG, GOOGL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA).
  • China is the biggest competitor to the U.S. in artificial intelligence.
  • The chart shows that the AI rally in Chinese stocks has fizzled.
  • China is close to deflation.  Consumer Price Index (CPI) in China is important for the Chinese domestic economy, but Producer Price Index (PPI) in China is important for the rest of the world, including the U.S. For this reason, investors should pay attention to PPI in China.  Here is the data:
    • China’s CPI came at 0.0% year-over-year vs. 0.2% consensus.
    • PPI in China came at -5.4% year-over-year vs. -5% consensus.
    • PPI in China has now fallen for nine consecutive months.
  • China is the factory to the world.  As producer prices in China fall, prices of exports from China also fall.  This is helping reduce goods inflation in the U.S. and making overall inflation numbers look good.
  • As we have written before, in The Arora Report analysis, it is the core services inflation ex-housing that is important for investors.  This includes items such as cost of travel, restaurants, and haircuts.  The Fed is also focused on core services inflation.
  • In The Arora Report analysis to counter deflation, the Chinese government is likely to provide stimulus.  Investors love stimulus as stimulus creates more money.  A part of the stimulus money rushes into the stock markets. 
  • In The Arora Report analysis, investors should not get too optimistic about stimulus in China because the Chinese government is likely to exercise restraint due to massive debt issues at the local government level.  
  • All eyes are on CPI that will be released on Wednesday, July 12 at 8:30am ET.
    • The consensus for both headline and core CPI is 0.3%.
    • Whisper numbers are 0.2% for headline CPI, and that is the reason momo gurus are using to prompt buying of stocks ahead of CPI release.  As is their pattern, the momo crowd is buying ahead of key data on hope strategy.  In contrast, smart money takes risk control measures ahead of key data.  Our decades of experience show that in the long term, hope is not a good investing strategy.  
  • Taiwan Semiconductor (TSM) is the world’s largest contract semiconductor manufacturer.  TSM manufactures chips for the likes of Apple, Nvidia, and AMD (AMD). TSM reported June 2023 revenues declined 11.1% year-over-year.
  • Negative data from TSM comes on the heels of negative semiconductor production data from Samsung (SSNLF).
  • Prudent investors need to make  note of the semiconductor production data from TSM and Samsung since semiconductors have been the leading sector in this year’s stock market rally.  Investors have been running up semiconductor stocks on the AI frenzy and also on the assumption that the order downdraft has bottomed.
  • As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.
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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.

Gold

Gold is seeing selling on China inflation data. 

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

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 is range bound.

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 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 $1920, silver futures are at $22.98, and oil futures are at $73.32.

S&P 500 futures are trading at 4433  as of this writing.  S&P 500 futures resistance levels are 4460, 4600, and 4713: support levels are 4400, 4318, and 4200.

DJIA futures are up 10 points.

Protection Band And What To Do Now

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

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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.

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.

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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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