By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Hawkish Fed Call
Please click here for a chart of Dow Jones Industrial Average ETF (DIA).
Note the following:
- The chart shows DJIA has been down nine days in a row. This is the longest in over 40 years.
- RSI on the chart shows DJIA is oversold. Oversold markets are susceptible to a bounce.
- There are two reasons DJIA has been down while S&P 500 (SPX), S&P 500 ETF (SPY), and Nasdaq 100 ETF (QQQ) have held up. DJIA is a price weighted index. S&P 500 is a cap weighted index.
- UnitedHealth (UNH) is one of the highest priced constituents of DJIA. UNH stock first went down on massive sympathy from the general public on the murder of UnitedHealth CEO. UNH stock took another leg down when President-elect Trump bought into the narrative propagated by the pharma industry that the reason for high drug prices is Pharmacy Benefit Managers (PBM). UnitedHealth owns one of the largest PBMs.
- DJIA has a lower technology weighting. In December, technology stocks are the ones that have been running up.
- It is important to look underneath the indexes. Do not be misled by SPY and QQQ. The average stock is down 4% in December.
- The FOMC will announce its decision on interest rates at 2pm ET. The announcement will be followed by Fed Chair Powell’s press conference at 2:30pm ET.
- As we shared with you in advance, The Arora Report call is for a hawkish rate cut. For details, please see the Morning Capsule from December 13.
- You may recall that when the Fed cut interest rates in September, everyone was expecting yields on long bonds to go lower. At that time, The Arora Report made a contrary call that yields on long bonds would go higher. That call has now proven spot on. At that time, the 10 year Treasury yield was 3.63%. The 10 year Treasury yield is 4.42%. Another good reference point is 20 – 30 year bond ETF TLT. TLT was trading at $100.23 before the Fed announcement. TLT is trading at $89.96 as of this writing in the premarket. As a reminder, bonds move inverse to the yield.
- In The Arora Report analysis, the most important point for prudent investors to watch from today’s Fed announcement is going to be the terminal rate and any indication of the neutral rate. Adding to The Arora Report’s stellar record of more correct calls related to the Fed than anyone else over the last 17 years is the long-standing Arora call that the neutral rate and the terminal rate will be higher than the Fed and the market expected. The last Fed projection was a terminal rate of 3.4%. At that time, the market was exuberant. The market consensus was a terminal rate of 2.78%. Now, the market has moved closer to The Arora Report call of 3.8% – 4%. We will be carefully watching the Fed’s projection of the terminal rate today.
- The Fed is not likely to give us a number for the neutral rate. The neutral rate is the rate at which the monetary policy is neither restrictive nor expansionary. So far, The Arora Report’s contrary call on the neutral rate has also been spot on.
- It is important for investors to understand the concepts of neutral rate and terminal rate. The easiest and the best way to understand these important concepts is to listen to the podcasts in Arora Ambassador Club.
- The momo crowd’s pattern is to buy before the Fed announcement on hopium. True to its pattern, the momo crowd is buying stocks in the early trade. In contrast, smart money’s pattern is to trim ahead of Fed announcements to control risks when there is uncertainty. True to its pattern, smart money appears to be trimming by lightly selling in the early trade.
- 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
Housing appears to be weakening. Here is the just released data:
- Housing starts came at 1289K vs. 1347K consensus.
- Building permits came at 1505K vs. 1430K consensus.
U.K.
Data shows inflation in the U.K. is at an eight month high. This is adding to stagflation concerns.
In The Arora Report analysis, this is important because the U.K. tends to lead the U.S. by several months.
Japan
The Bank of Japan (BOJ) is about to discuss a potential rate hike.
Magnificent Seven Money Flows
In the early trade, money flows are positive in Amazon (AMZN) and Nvidia (NVDA).
In the early trade, money flows are neutral in Alphabet (GOOG) and Meta (META).
In the early trade, money flows are negative in Apple (AAPL), Microsoft (MSFT), and Tesla (TSLA).
In the early trade, money flows are mixed 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 *** stocks 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.
Very Very Short-Term Indicator
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.
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.
Oil
API crude inventories came at a draw of 4.7M barrels vs. a consensus of a draw of 1.85M 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
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.
S&P 500 futures are trading at 6133 as of this writing. S&P 500 futures resistance levels are 6256, 6500, and 6700: support levels are 6131, 6017, and 5926.
DJIA futures are up 76 points.
Gold futures are at $2657, silver futures are at $30.80, and oil futures are at $70.23.
Protection Band And What To Do Now
It is important for investors to look ahead and not in the rearview mirror. The proprietary protection band from The Arora Report is very popular. The protection band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.
Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding *** in cash, Treasury bills, short term fixed income, 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.
