FED AHEAD – DO NOT IGNORE THE HIGHLY FLAWED MOMO NARRATIVE FOR A RIP-ROARING RALLY

By Nigam Arora & Dr. Natasha Arora

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

Highly Flawed Narrative

Please click here for a chart of long bond ETF TLT.

Note the following:

• Bonds move inverse to the yield.  As yields on short duration debt have risen, the yields on long bonds have not kept up.  The reason is that inflation expectations over 20 – 30 years are low.  In The Arora Report analysis, these low inflation expectations over the very long term will likely turn out to be wrong.  
• The chart shows that TLT has fallen below the support.  This is a negative for the stock market.
• The chart shows a downward sloping trendline.  This is a negative for the stock market.
• The chart shows that RSI is oversold.  This, in part, is helping the highly flawed narrative of the momo gurus that the yield will not go any higher and this in turn will help a rip-roaring rally in the stock market.
  • Prudent investors need to pay attention, as in the very short term the technical setup favors the momo crowd.
• Prudent investors need to pay attention to the highly flawed momo narrative that has taken shape that ran up the stock market going into the close yesterday.  Here is the narrative.
  • If the Fed raises rates by 75 bps, the stock market will go up because the Fed did not raise rates by 100 bps.
    • Here is The Arora Report call.  There is a 70% probability of a 75 bps interest rate hike, and a 30% probability of a 100 bps interest rate hike.
  • If the Fed raises rates by 100 bps, it would mean that the Fed has regained its credibility to fight inflation, and for this reason, the stock market will go up.
  • There will be plenty of opportunities to twist Powell’s words to persuade the momo crowd to buy.
  •  If all else fails, the “do not believe the Fed” narrative has proven to be sticky with the momo crowd.
• In The Arora Report analysis, the foregoing narrative is highly flawed, but investors need to pay attention to it because of positioning.  The positioning is negative going into the Fed meeting.  For this reason, it will take only a tiny move up for the algorithms to start buying.
  • If a tiny move up occurs, investors who follow technical analysis will get a buy signal and start buying.
  • You saw the proof of the power of this narrative in a strong rally going into the close yesterday.  The positioning coming into  yesterday was negative.
  • Understanding the positioning can give you a big edge in the market and can significantly increase your returns over a long period of time.  Understanding positioning also helps you reduce  your risk.  To gain in depth knowledge on positioning, listen to the podcast titled “Market Mechanics: Positioning To Gain An Edge.” 
• The sum total of the foregoing is that investors need to stay cautious but, at the same time, should not ignore the potential of a rip-roaring rally due to the flawed narrative that is being set up.

Housing Starts

Housing starts came at 1.575M vs. 1.448M consensus.  More housing starts than expected is a surprise in this environment.  This is helpful for a bullish case on the stock market.  

Building permits came at 1.517M vs. 1.610M consensus.

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

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

For longer-term, please see oil ratings.

Bitcoin

Bitcoin is above $19,000.

Markets

Our very, very short-term early stock market indicator is 🔒 but be careful because the momo crowd will likely buy ahead of the Fed on hope strategy.  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 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 $1675, silver futures are at $19.24, and oil futures are at $85.56.

S&P 500 futures resistance levels are 3950, 4000 and 4200: support levels are 3860, 3770 and 3630.

DJIA futures are down 225 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 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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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.