FED GIVES GREEN LIGHT TO MAKING THE STOCK MARKET BUBBLE BIGGER $DJIA $SPX $NDX $QQQ $GLD $SLV $USO $SPY

FED GIVES GREEN LIGHT TO MAKING THE STOCK MARKET BUBBLE BIGGER $DJIA $SPX $NDX $QQQ $GLD $SLV $USO $SPY

This post was published yesterday in The Arora Report  paid feeds as Afternoon Capsule.

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

Making The Stock Market Bubble Bigger

In a historic speech, Powell changed Fed’s long standing policy.  Here are the key points.

  • Previously the Fed was targeting 2% inflation.
  • Under the new policy, the Fed will target 2% average inflation. This is a big change with serious implications.
  • Since during periods of economic weakness, inflation may fall, during periods of expansion, the Fed will let inflation run higher than 2%.
  • Historically the Fed raises interest rates to prevent inflation from rising.
  • This time the Fed plans to keep interest rates low for a long time and does not plan to stop inflation from rising.
  • There is no set formula to compute the average. The Fed will be flexible.

Implications

Here are the implications of the Fed’s new policy.

  • This is a green light to make the stock market bubble bigger.
  • The new policy will punish savers more than before.
  • The new policy will reward borrowers more than before.
  • The new policy will punish those who are prudent with their risk taking.
  • The new policy will reward reckless risk taking.

Adjustments

Due to this new Fed policy, adjustments to the portfolios will need to be made.  The plan is to make these adjustments judiciously and methodically over a period of time.

Please click here for a chart of volatility ETF VXX which represents Wall Street’s fear gage VIX.

Note the following:

  • The chart shows the time when Powell’s speech text was released.
  • When a major event is over as expected, VXX normally goes down.
  • When Powell’s transcript was released and it was as expected, VXX should have gone down.
  • The chart shows that VXX went up instead of going down.
  • The stock market went up on Powell’s speech.
  • When the stock market goes up, VXX tends to go down.
  • The chart shows that as the stock market went up, VXX also went up.

The foregoing indicates that prudent investors have not completely given up.  They are concerned that the Fed’s policies are not good in the long run and perhaps even in the short run. This is why VXX was bought for portfolio protection.  This is simply an observation and not a call to buy VXX.  Please stay tuned to the section titled ‘Protection Bands and What To Do Now?’ in the Morning Capsule. Adjustments will be made as appropriate. 

Some of the protection has been left in place in our proactive anticipation of this policy change by the Fed. Due to the proactive measures, no immediate change is needed.

Money Flows

The momo crowd money flows since the Morning Capsule are very positive.

Smart money flows since the Morning Capsule are neutral.

Short squeeze money flows are very positive.

A Special Note To New Subscribers

Note the smart money behavior.  Smart money tends to sell into strength on strong up days.

New subscribers should consider adopting smart money’s  way of investing and trading.

Sentiment

Sentiment is very positive boarding on extreme.

Sentiment is a contrary indicator at extremes.  In plain English, this means that when sentiment becomes extremely positive it is time to sell and when sentiment becomes extremely negative it is time to buy.

Gold

The momo crowd money flows in gold are negative since the Morning Capsule.

Smart money flows are  neutral in gold  since the Morning Capsule.

Oil

The momo crowd money flows in oil are positive since the Morning Capsule.

Smart money flows in oil are neutral  since the Morning Capsule.

Buy Zones And Buy Now Ratings

Those who meet the protection band criteria as outlined in the Morning Capsule and are underinvested may consider continuing to lightly scale in based on buy zones and ‘Buy Now’ ratings of individual securities.

Any buying should be strategic and not tactical unless there are specific recent signals given.

It is a mistake to buy all in at one time.  Please see Trade Management Guidelines.

Nibbling

Consider not nibbling at this time if you are under invested and there is significant room in your protection band criteria.

Nibbling refers to buying very small quantities, often in existing long term positions with the intention of exiting these additions in the short term. It is similar to trade around positions but without specific signals.

Close

There appear to be buy on close orders.

There is merit to watching the pattern of market on close orders as they represent the day’s dominant net cumulative activity  by many professionals and funds.

The Afternoon Capsule is not  published daily but only when conditions warrant it.  The content below is unchanged and is to be used for reference as needed. 

Sophistication 

Many investors are spoiled due to the decade long bull market.  Many believe it is very simple – be all in or be all out.  Unfortunately, the last decade was an exception to the rule.

As the market is running up, investors who do not understand the true nature of the market are jumping in with both feet without appreciating the risks.

Risk and reward are two sides to the coin. It is important to consider both.

For your reference, we are pasting the following from your Getting A Running Start Guide,

Everything should be made as simple as possible but not simpler.

Albert Einstein

Strategic Vs. Tactical

All investors should consider bringing more sophistication to their investing and trading.  It is important to clearly understand the difference between strategic and tactical calls.  For your convenience, a prior post is pasted below.

ASK ARORA: CASH AND HEDGES: UNDERSTANDING THE DIFFERENCE BETWEEN STRATEGIC AND TACTICAL CALLS

Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

We have written previously about the importance of understanding the difference between strategic calls and tactical calls.

We welcome your comments and questions.  The law does not allow us to answer them individually. However, when a large number of subscribers ask similar questions, a post is done.  Typically starting with Ask Arora.

Based on the questions received this morning, a refresher on understanding the difference between strategy and tactics is in order.

Strategy

Strategy defines medium to long term plan to achieve the highest risk adjusted returns.

Tactics

Tactics are small adjustments within the strategy to further enhance risk adjusted returns.

If You Could Pick Only One

We recognize that all investors have individual preferences.  If you could pick only one, consider focusing on the strategy. Never focus only on tactics at the expense of strategy. 

Strategic Call

The strategic call at this time is to stay cautiously bullish.  The logic is very straightforward.  Consider the following key points:

  • The stock market has been going straight up for 10 years.  It is late cycle.  Portfolios have to be organized for the late cycle.  Risks are much higher in the late cycle compared to when a bull market is in an early stage.
  • The world is awash in debt.  The sovereign debt owed by governments and corporate debt owed by zombie corporations has dramatically increased.  It is a bubble that is getting bigger waiting for a pin to prick it.
  • Valuations are expensive.
  • A big reason for levitation of the stock market is money printing by the central banks.   This can continue for a long time but not forever.

Tactical Calls

Tactical calls are simply short term adjustments.  For example, a tactical call to decrease cash and hedges is based on the following:

  • Weak hands temporarily washed out overbought condition.
  • Overbought condition temporarily relieved.
  • Sentiment backing off from almost extreme bullish levels.
  • Overall better earnings.

Cash And Hedges

We provide a range for cash and hedges.  Most investors would be in the middle of the ranges.  As such, they would not need to make any change.  When a change is given only at the edges of the ranges, only the most active investors need to make a change.

Arora’s 12th Law

Arora’s 12th Law is applicable here: To be successful at investing and trading, flow with the new data and stay nimble.

Bullet Proof Your Portfolio And Increase Your Returns

We consistently see that private investors, money managers and investment advisors who have attended the Bullet Proof Your Portfolio and Increase Your Returns seminar do significantly better compared to those who have not attended the seminar.

Here are the four main reasons why this consistently happens to investors who attend the seminar:

  • They start understanding the true nature of the markets.
  • Develop a better framework to handle the true nature of the market.
  • Tend to act with more conviction and with more comfort.
  • Tend to develop a better control over their emotions.

A knowledgeable investor would have turned $100,000 into over $1,000,000 with the help from The Arora Report. NOW YOU TOO CAN ALSO SPECTACULARLY SUCCEED AT MEETING YOUR GOALS WITH THE HELP OF THE ARORA REPORT. You are receiving less than 2% of the content from our paid services. …TO RECEIVE REMAINING 98% INCLUDING MANY ATTRACTIVE INVESTMENT OPPORTUNITIES, TAKE A FREE TRIAL TO PAID SERVICES.

Please click here to take advantage of a FREE  30 day trial.

Check out our enviable performance in both bull and bear markets.

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