POTENTIAL MAKE OR BREAK CPI AHEAD – BONDS MOVE CLOSER TO THE FED BUT STOCKS FIGHT

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By Nigam Arora & Dr. Natasha Arora

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

CPI Ahead

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 came down to the low band of the support/resistance zone.
  • The chart shows that the stock market is trying to bounce from the low band of the support/resistance as expected.
  • The chart shows RSI can go either way.
  • Going into the all-important CPI number, bonds have moved closer to the Fed position.
    • The Fed announced its decision on February 1.  On February 2, the yield on 2-year Treasuries hit 4.09%.  From that low, there is a significant move up to 4.551% as of this writing.
    • The yield on 10-year Treasuries has moved from the low of 3.33% on February 2 to 3.745% as of this writing.
  • In contrast to bonds, stocks continued to rally until Friday.
  • The reason behind the contrast in stocks and bonds is that the stock market is dominated by the momo crowd. Momo gurus’ narrative to fight the Fed has taken hold in the stock market.  The bond market is not dominated by the momo crowd.  The prevailing narrative in the bond market is to not fight the Fed.
  • CPI is potentially a make or break moment for the stock market rally.  Bulls are expecting cooler CPI, and bears are expecting hotter CPI.
  • We previously wrote:

After analyzing all of the data that gives us indications about CPI, in The Arora Report analysis, the probability of CPI coming better or worse than the consensus is about evenly split.

  • We also previously shared that the Cleveland Fed model is predicting a headline CPI of 0.63% month-over-month.  As of this morning, it has come down to 0.61%.
  • We previously shared with you that the Cleveland Fed model is predicting January Core CPI of 0.46% month-over-month.  As of this morning, it remains 0.46%.
  • As is their pattern, the momo crowd is buying stocks ahead of CPI.  The momo crowd uses hope strategy.  The momo crowd is hoping for a cooler CPI.  What happens if CPI is hotter than expected?  Well, risk is not part of the momo crowd’s equation.
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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

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 positive impact of the Russian production cut has faded. Oil is being sold on the prospect of a higher CPI tomorrow.

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

For longer-term, please see oil ratings.

Bitcoin

The New York Department of Financial Services has ordered Paxos to cease issuing Binance USD.  Binance USD is the third largest stable coin.  It is held by 6.2M investors.

Bitcoin has pulled back along with speculative stocks.  It is trading below $22,000.

Markets

Our very, very short-term early stock market indicator is 🔒.  What the market does today will come down to how aggressive momo buying 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 range bound.

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.

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Gold futures are at $1867, silver futures are at $21.96, and oil futures are at $79.05.

S&P 500 futures are trading at 4107  as of this writing.  S&P 500 futures resistance levels are 4200, 4318 and 4400: support levels are 4000, 3950 and 3860.

DJIA futures are down 18 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 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.

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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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