By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Fed Credibility At Stake
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 near the resistance zone.
- The chart shows that the rally has been on low volume. This indicates a lack of conviction.
- The chart shows that RSI has just entered the overbought zone. This indicates that the stock market can go either way.
- The chart shows that if the stock market does not break out and turns down from here, it will be tracing a triple top. A triple top is a negative pattern.
- FOMC will announce its rate decision at 2pm ET today and will be followed by Powell’s press conference at 2:30pm ET.
- Understanding Wall Street positioning can give investors a big edge. Wall Street is positioned for a 50 bps cut and highly dovish comments.
- In The Arora Report analysis, the totality of data does not justify a 50 bps cut. Further in The Arora Report analysis, the totality of data does not justify very dovish commentary.
- In The Arora Report analysis, if the Fed complies with the momo crowd’s demands, the Fed’s credibility will be hurt in the long run. There may be unintended consequences. One unintended consequence may be a rise in long term yields in due course. The other potential unintended consequence may be an unhealthy drop in the dollar.
- If the momo crowd gets what they want, S&P 500 at 6000 is a magnet for traders.
- If the momo crowd gets what they want, the momo crowd will aggressively buy. However, it is not clear how smart money will react. There is a fair probability of smart money taking advantage of the strength to sell.
- If the Fed cuts by 25 basis points, then the market reaction will depend on commentary and the dot plot.
- In The Arora Report analysis, if the Fed cuts by 25 bps and the commentary is not dovish, there is a downside risk to the stock market.
- Those who would like next level information, please listen to the podcast titled “A CONTRARIAN CALL ON THE INTEREST RATE CUT CYCLE.”
- Prudent investors need to be very mindful that the Fed is about to cut interest rates at a time when the stock market is near its all time high, house prices are near all time highs, and the economy is strong. Historically, the Fed cuts interest rates when the economy is weak or in recession, house prices are falling, and the stock market is weak. By aggressively cutting interest rates now accompanied by highly dovish commentary, the Fed risks its long term credibility. Highly dovish action now also has the potential to start rampant speculation in stocks, housing, and cryptos.
- A 50 bps cut and highly dovish commentary will be helpful for a Harris election. The Fed will never admit it, but there is a school of thought that the Fed wants to help Harris win the election. The reason is that Trump has already said he will not reappoint Powell. Further, Trump has said that he will interfere with the Fed.
- As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the protection band. The protection band is one of the large number of unique edges that are available to members of The Arora Report.
Housing Starts
Housing starts came at 1356K vs. 1320K consensus.
Building permits came at 1475K vs. 1415K consensus.
In The Arora Report analysis, activity among builders is increasing as they anticipate falling interest rates will let loose pent up demand. This will increase economic activity, which in turn is good for the stock market.
Magnificent Seven Money Flows
In the early trade, money flows are positive in Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Meta (META), and Tesla (TSLA).
In the early trade, money flows are neutral in Amazon (AMZN) and Nvidia (NVDA).
In the early trade, money flows are positive in S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ).
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.
Note for new members: Smart money often sells into the strength generated by momo crowd buying and buys into the weakness generated by momo crowd selling. Over a long period of time, investors come out ahead by adopting smart money’s ways. The exception is in a raging bull market – for very short term trades, consider following the momo crowd and not smart money.
Gold
In The Arora Report analysis gold has run up in anticipation of a 50 bps cut and highly dovish Fed commentary. There is a downside risk to gold if the Fed cuts by only 25 bps and the commentary is not highly dovish.
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
API crude inventories came at a build of 1.96M barrels vs. a consensus of a draw of 0.1M barrels
The momo crowd is *** in oil in the early trade. Smart money is *** in the early trade.
For longer-term, please see oil ratings.
Bitcoin
Bitcoin (BTC.USD) is seeing buying in anticipation of a 50 bps rate cut. Bullish crypto gurus are hopeful that a 50 bps cut will take bitcoin to a new high.
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 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 $2601, silver futures are at $30.93, and oil futures are at $69.41.
S&P 500 futures are trading at 5707 as of this writing. S&P 500 futures resistance levels are 5748 and 5926: support levels are 5622, 5500, and 5400.
DJIA futures are up 48 points.
Protection Band 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.
A protection band of 0% would be very bullish and would indicate full investment with 0% in cash. A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.
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 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 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.
