HOTTER CPI – MOMO CROWD USING HOPE STRATEGY GETS BURNED AGAIN

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By Nigam Arora & Dr. Natasha Arora

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

Hotter CPI

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:

  • Consumer Price Index (CPI) came hotter than expected.
    • Headline CPI came at 1.3% vs. 1.1% consensus.
    • Core CPI came at 0.7% vs. 0.6% consensus.

THIS CLASSIC MISTAKE WILL COST YOU DEARLY – HERE IS HOW TO AVOID THE PITFALL

  • The chart shows that S&P 500 was at the upper band of the support/resistance zone prior to the release of the numbers and is now at the low band of the zone.  This wide range is due to the momo crowd’s behavior.
  • The momo crowd’s behavior this time is the exact replica of what they were doing last month, and many months before, prior to release of the CPI number.  Every single time momo gurus’ hope strategy has been wrong and the momo crowd has been burned, yet they persist in using the hope strategy.
  • The momo crowd was buying aggressively going into the release of the number, including this morning, on the hope that inflation had peaked and the CPI numbers would be less than the consensus.
  • Of special note is that a few seconds before the release of the numbers, there was huge, aggressive buying in stock futures taking out stops of short sellers.  Short sellers have proven to be right that the CPI numbers would be worse than the consensus, yet they lost money because their stops were taken out only a few seconds before the release. 
    • This illustrates the beauty of The Arora Report Trade Management Guidelines of staggering stops in stop zones instead of stops at just one point.
    • This also illustrates the beauty of the ZYX Change Method of not putting stops at an obvious place where they get hunted.
  • RSI on the chart shows that the market can potentially go lower.
  • After the stock market lost its morning gains and fell as much as 400 DJIA points, the momo crowd has become very aggressive in buying again.
  • Since oil has fallen in July and gas prices are coming down, expect inflation numbers for July to moderate.  Expect momo gurus to latch onto the simple fact, and urge their followers to aggressively buy stocks.
  • Beige Book will be released at 2pm.
  • Expect momo gurus to twist the Beige Book in coming up with more reasons to buy stocks.
  • Tomorrow morning important earnings will be released from banks JPM and MS, semiconductor manufacturer TSM, and consumer staple company CAG.
  • This first set of earnings in the earnings season are important because they tend to set the direction.
    • More important than earnings will be what the companies say about the guidance for the next quarter.
  • The probability of a 75 basis point hike in September has doubled to 78% after the CPI numbers this morning.  
  • The probability of a 75 basis point hike later this month is now 95%.
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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

In gold, there is a push pull between inflation and higher interest rates.  Inflation is good for gold, but higher interest rates are bad for 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

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 coming under pressure but still holding above $19,000.  Higher interest rates are not good for bitcoin.

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 $1717, silver futures are at $18.86, and oil futures are $96.16.

S&P 500 futures resistance levels are 3860, 3950, and 4000: support levels are 3630, 3600, and 3520.

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DJIA futures are down 320 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, 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.

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This post was just published on ZYX Buy Change Alert.

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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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