HOW FED SOLVES THE MOMO CROWD DILEMMA WILL DETERMINE THE STOCK MARKET DIRECTION IN THE SHORT TERM

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By Nigam Arora & Dr. Natasha Arora

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

Fed’s Dilemma

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

Note the following:

  • The chart shows that QQQ is up against the lower band of the resistance zone.
  • The chart shows that this rally has not been on high volume. This is a negative.
  • The chart shows RSI divergence.  In plain English, this means that as price has risen, RSI has declined. This is a negative.
  • FOMC is meeting starting tomorrow.
  • FOMC will announce its decision at 2pm ET on Wednesday, followed by Powell’s press conference at 2:30pm ET.
  • Based on all of the data we analyze, in The Arora Report analysis, the following is the appropriate course of action for the Fed.
    • Raise interest rates by 25 basis points.
    • Continue with quantitative tightening at the present pace.
    • Announce that any future rate hikes will be data dependent.
    • Announce that the Fed will patiently wait to see the impact of massive rate hikes so far.
    • Announce that the Fed does not intend to cut rates until it is convinced that not only will inflation move towards its target of 2% but also that inflation will not come back.
  • Based on all of the information we gather, it appears that what the Fed wants to do is aligned with The Arora Report analysis above.  However, the Fed faces a dilemma.  For the Fed to follow this course, financial conditions need to stay tight.
  • Financial conditions consist of several components with the stock market being one of the components.  However these days, a higher stock market is triggering other components to go higher, resulting in looser financial conditions.
  • Financial conditions have already loosened considerably because the momo crowd ran up the stock market going into the Fed meeting.  If the Fed embarks on the course mentioned above, momo gurus will issue aggressive buy signals, and the stock market will rocket to the upside. Such a move in the stock market will loosen financial conditions with a high probability of getting in the way of reducing inflation.  
  • The stock market has run up based on the presumption that the Fed will start cutting rates as early as April of this year and there will be at least two rate cuts this year.  Such rate cuts fly in the face of the Fed’s desire to not commit Burns’s blunder.  Burns’s blunder refers to the 1970s when the Fed Chair Arthur Burns lowered interest rates in response to declining inflation only for inflation to come roaring back.
  • Where the stock market goes in the short term will depend on how the Fed solves this dilemma.
  • The momo crowd has run up the stock market going into every Fed meeting on hope strategy.  Every time, the Fed has slapped the momo crowd with a big rate hike.  Every time, the stock market fell after the Fed meeting.  This time it is different in the sense that the hard data does not justify the Fed slapping the momo crowd.  
See also  RELIEF RALLY ON FED’S FAVORITE INFLATION DATA, AI EARNINGS EXPECTATIONS OVERDONE

Europe

The momo crowd has recently been successful in running up European stocks on the narrative that there will not be a recession in Europe.  This morning the new GDP data from Germany is igniting recession fears again. Q4 GDP in Germany came at -0.2% quarter-over-quarter vs. 0.0% consensus. 

New data shows that inflation in Spain is hotter than expected.

War With China

Air Force General Mike Minihan said in a memo to the officers he commands that he is predicting a war with China in two years.  He is asking his officers to get ready for the war.

What War?

At a time when prudent investors are very concerned about a war with China over Taiwan, the momo crowd is rushing headlong to buy stocks in Taiwan.  Stocks in Taiwan rose 3.8% overnight.  This is the best performance since May 2021.  Stocks in Taiwan are now entering a new bull market.

Iran

There have been explosions at a military factory in Iran due to a drone attack.  There is speculation that Israel is behind the attack.  So far, the markets are oblivious.  However, prudent investors should keep an eye if there is an escalation.

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.

See also  SILVER, GOLD, AND COPPER BREAKOUT, WALL STREET’S LAST BEAR THROWS IN THE TOWEL

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 bulls are disappointed that whales did not run up bitcoin on Friday night, taking advantage of the low liquidity. Last week, bitcoin was running up as retail investors anticipated whales buying on Friday night.  Whales did not buy on Friday night, and bitcoin is down 2.62% and trading at $23,123 as of this writing.

Markets

Our very, very short-term early stock market indicator is 🔒 but can quickly turn 🔒 if momo buying becomes aggressive.  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 $1946, silver futures are at $23.85, and oil futures are at $78.01.

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

DJIA futures are down 138 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.

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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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Picture of 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.

Picture of 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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