By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Fed Quandary
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 is a weekly chart to give investors a longer term perspective.
- The chart shows that the trendline is still intact.
- The momo crowd is going to continue to buy unless there is a sustained breakdown below the trendline for more than one week.
- The chart shows two weekly dojis. The doji is a candle pattern where opening and closing prices are very close to each other. A doji pattern indicates indecision. The chart shows two weeks of indecision.
- The latest candle shown on the chart is only for a partial week as of this writing. The Fed decision later today will determine how the candle for this week develops.
- The two weekly dojis are instructive in that the general belief is that the stock market is running up, but the two dojis on the chart say otherwise.
- The FOMC statement will be released at 2pm ET today followed by Powell’s press conference at 2:30pm ET.
- The momo crowd has continued to aggressively buy stocks. The momo gurus want the Fed to bow to them and start cutting rates, or at a minimum clearly indicate that rate cuts are coming soon.
- Prudent investors need to understand that the Fed and momo gurus have very different objectives.
- The momo gurus’ sole objective is to run up the stock market in the short term in the disguise of analysis.
- The Fed has a dual mandate – price stability and maximum employment.
- The Fed is concerned about the long term economy of the entire U.S. Momo gurus are only concerned about the stock market in the short term.
- The Fed faces several problems:
- The last two CPI numbers and the last PPI number were hotter than expected. The data shows that inflation is not coming down as the Fed had hoped.
- The economy is staying stronger than the Fed had hoped in view of high interest rates.
- Financial conditions have become easier in spite of the Fed keeping rates high.
- Easier financial conditions make it difficult to control inflation.
- Financial conditions have become easier than expected for three reasons.
- The stock market has gone up, generating a wealth effect.
- House prices are going up, generating wealth effect.
- The federal government continues to recklessly spend on a variety of programs and that spending is making financial conditions easier.
- It is like the Fed is pushing the brake pedal on the monetary side and the government is pushing the accelerator at the same time on the fiscal side.
- Here’s the key question for investors, “What happens to the stock market if the Fed decides to do the right thing?”
- In The Arora Report analysis, the right thing for the Fed to do is to keep interest rates high until financial conditions tighten or inflation data gets better or the economy weakens.
- The stock market is not prepared for the Fed to do the right thing. If the Fed decides to do the right thing, expect a pullback in the stock market. On the other hand, if the Fed decides to bow to the momo crowd, expect the rally to continue, potentially reaching 5400 in S&P 500.
- The guidance may change after the Fed meeting.
- 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.
U.K.
U.K. data often precedes the U.S. data in the same direction. In the U.K., Consumer Price Index (CPI) came cooler than expected. Here are the details:
- Headline CPI came at 0.6% month-over-month vs. 0.7% consensus.
- Headline CPI came at 3.4% year-over-year vs. 3.5% consensus.
- Core CPI came at 0.6% month-over-month vs. 0.7% consensus.
- Core CPI came at 4.5% year-over-year vs. 4.6% consensus.
Magnificent Seven Money Flows
In the early trade, money flows are positive in Meta (META) and Tesla (TSLA).
In the early trade, money flows are neutral in Amazon (AMZN), Alphabet (GOOG), Nvidia (NVDA), and Microsoft (MSFT).
In the early trade, money flows are negative in Apple (AAPL).
In the early trade, money flows are mixed in S&P 500 ETF (SPY) and positive 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.
Gold
The momo crowd is *** 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 draw of 1.519M barrels vs. a consensus of a build of 0.077M barrels.
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 (BTC.USD) is range bound.
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 and bonds are range bound.
The dollar is stronger.
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 $2156, silver futures are at $24.98, and oil futures are at $81.45.
S&P 500 futures are trading at 5238 as of this writing. S&P 500 futures resistance levels are 5256, 5400, and 5500 : support levels are 5210, 5020, and 4918.
DJIA futures are down 57 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.
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 seven 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.
