TO AVERT CRISIS, EMERGENCY ECB MEETING AHEAD OF FED; CONSUMER SLOWS

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By Nigam Arora & Dr. Natasha Arora

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

Fed Day

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 is at a critical junction.
  • The chart shows that yesterday the stock market fell below the low band of the support zone.
  • The chart shows that this morning bulls are trying to rally the stock market ahead of the Fed meeting.
    • This is all momo crowd buying in the early trade.
    • The pattern of the momo crowd buying ahead of the Fed meeting is holding true.
  • The chart shows that RSI is now oversold.
  • The chart shows that our call based on RSI has proven spot on.  Our reading of RSI was that the market could go lower when most experts were calling for the market to go higher based on RSI. At a time when the stock market was significantly higher, we wrote

Those with deep knowledge of RSI will see that RSI shows that there is more room to fall.  On the other hand, those without deep knowledge of RSI will claim that RSI is oversold and will give a buy signal.

  • RSI now is such that the stock market can easily move significantly whichever direction it first starts moving.  The reason is that the momo crowd will start buying aggressively if the market starts moving higher, but the momo crowd will start selling if the market moves lower.  Wall Street’s machines will exaggerate the move whichever direction the market is moving.
  • Be careful with the media.  Have you noticed that the media becomes bullish when the stock market starts going up, and then they turn on a dime and become bearish when the market starts going down?
  • Remember that historically, the first reaction to the Fed is often the wrong reaction and often reverses. 
  • The debate rages about the amount of the rate hike.  In our analysis, at this time, it is not the amount of the rate hike but the guidance for the future the Fed gives that will be a market moving event.  

Averting The Crisis

European Central Bank (ECB) held an emergency meeting this morning to avert the crisis.

You may remember the European crisis about a decade ago. At that time the consensus was that the euro would not survive.  Long time subscribers will remember that The Arora Report’s call at that time was among a small minority that the euro would survive.  Our call turned out to be correct, and that resulted in a number of profitable investments.

What is happening now in Europe is very similar to what started the crisis a decade ago.  Bid ask spreads on bonds in countries such as Italy, Spain, Portugal, and Greece are widening.  

The fundamental issue is and has always been that northern European countries have more fiscal discipline than southern European countries.  

ECB has announced that it will create a new tool to prevent the risk of eurozone fragmentation. This is a positive.

Consumer Slows

The US economy is about 70% consumer based.  For this reason, investors should pay attention to retail sales. Here are the details of the new data just released.

  • Retail Sales came at -0.3% vs. +0.2% consensus.
  • Retail Sales Ex-auto came at 0.5% vs. 0.7% consensus.

There has been much debate about the contradiction between consumer continuing to spend and low consumer sentiment. Now with this data that debate is settled. The consumer was suffering from recency bias just like investors are still suffering from recency bias.

The consumer has now caught up with the reality and is slowing down.  Prudent investors should note that most investors, their gurus, and the media have still not caught up with reality.

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

The momo crowd is 🔒 gold in the early trade as is their pattern ahead of the Fed meeting.

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 🔒 oil in the early trade.

For longer-term, please see oil ratings.

Bitcoin

About a month ago when bitcoin was trading at $31,280,  The Arora Report call was that the target for bitcoin was $21,000.  Bitcoin has now hit $21,000 and the call has proven spot on.

The main reason behind the call was that MicroStrategy (MSTR) was a sitting duck because it would receive a margin call if bitcoin were to fall below $21,000.  MicroStrategy’s average cost is about $30,000.

Our 30 years in the markets have taught us that when something becomes a sitting duck, markets will take it out.

Expect bulls to buy and take a stand in the range of $20,000 – $21,000 in an attempt to run bitcoin higher. Having said that in our analysis, there are many more margin calls ahead if bitcoin falls below $19,000.  If these margin calls materialize, the next target zone is $15,000 – $16,000.  It will all come down to how high bulls can rally from here.

Gold will benefit from this fall in bitcoin.  The only reason gold did not rise to $2,500 is because the money that would have normally moved into gold moved into crypto.  However gold does not like rising interest rates and rising interest rates are a headwind for gold.

Markets

Our very, very short-term early stock market indicator is 🔒 and will depend on the guidance from the Fed. 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 after a very large move higher in interest rates yesterday.

The dollar is weaker after a strong recent upmove.

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 $1835, silver futures are at $21.62, and oil futures are $118.87.

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

 futures are up 220 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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