WEEKLY STOCK MARKET DIGEST: INFLATION HIGHEST SINCE 1981 – STOCK MARKET HOPE STRATEGY FAILS

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By Nigam Arora & Dr. Natasha Arora

Weekly Digest from The Arora Report is popular among serious investors and money managers because they have found studying insights from the prior week gives them an edge over the coming weeks. Here is the day by day rundown from the morning capsules made available every morning before the market open in the Real Time Feeds to the paying subscribers of The Arora Report

Please scroll down for the section ‘Protection Bands and What To Do Now.’

INFLATION HIGHEST SINCE 1981 – HOPE STRATEGY FAILS

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

Interim Capsule

Please start by reading the Interim Capsule that was issued immediately after CPI numbers were released.

Please pay attention to changes in the Protection Bands And What To Do Now section below.

High Inflation

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 Consumer Price Index is the highest since 1981. Here are the details:
    • CPI came at 1.0% vs. 0.7% consensus.
    • Core CPI came at 0.6% vs. 0.7% consensus.
  • We have been repeatedly sharing with you that the hope strategy employed by the momo crowd and their gurus is not a good strategy. We also shared with you that momo gurus had come up with a narrative of peak inflation and were urging their followers to buy ahead of the CPI number. They were predicting a massive rally after the release of better than expected CPI numbers. The hope strategy has failed again. We wrote on June 8 in the Morning Capsule:

Momo crowd uses the hope strategy and buys ahead of the events. In contrast, smart money buys ahead of an event only when there is a high probability and probability adjusted risk reward is favorable. Expect the momo crowd to buy ahead of ECB and ahead of the CPI data release.

  • The chart shows that in the early trade the market has fallen around the low band of the top support zone.
  • The chart shows that RSI has fallen but has room to fall more.
  • In theory, the market should fall to the support zone shown on the chart.
  • In practice, Wall Street and momo gurus will come up with a narrative to persuade investors to buy in the hope of preventing the market from falling.
  • Of significant importance is that the interest rates at the long end are falling from their high reached immediately after the release of the CPI number. This is  in the early trade. It is yet to be seen if this will persist.  The expectation would have been for interest rates at the long end to rise significantly.  The reason that interest rates at the long end are falling on this hot CPI number is higher probability of a recession.
  • Momo gurus may use falling interest rates at the long end as one argument to persuade their followers to buy stocks.

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.

Gold

Gold does not like higher interest rates. Gold is being sold on the prospect of higher interest rates. However, gold is an inflation hedge, and that should provide support to 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

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

For longer-term, please see oil ratings.

Bitcoin

Bitcoin is not moving with aggressive speculative stocks

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 on the short end but ticking down on the long end. Short term bonds are falling, but long term bonds are rising.

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 $1840, silver futures are at $21.58, and oil futures are $121.61.

S&P 500 futures resistance levels are 4000, 4200 and 4318: support levels are 3860, 3770 and 3630.

 futures are down 419 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.

See also  STOCK MARKET BULLS GET THE BAD NEWS THEY HAVE BEEN WANTING AHEAD OF MOTHER OF ALL NUMBERS

 

INVESTORS PAY ATTENTION: EUROPEAN CENTRAL BANK TO STOP MONEY PRINTING

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

ECB Stops Net Asset Purchases

Please click here for a chart of the European Central Bank (ECB) balance sheet.

Note the following:

  • The chart shows that since the 2008 financial crisis the ECB balance sheet has dramatically risen.
  • Investors need to worry not only about the Fed, but also about ECB and Bank of Japan.
  • After its meeting, ECB has decided that it will stop net asset purchases as of July 1. In plain English, this means that ECB will no longer be printing money.
  • ECB will raise its key interest rate by 25 basis points at its July meeting.
  • ECB is open to raising interest rates in the future by higher amounts such as 50 basis points if inflation data deteriorates.
  • ECB will make decisions based on medium term inflation outlook.
  • As a reference point, inflation hit 8.1% in May in the euro area.
  • ECB is revising its inflation projections upwards to 6.8% in 2022, falling to 3.5% in 2023, and 2.1% in 2024.
  • The new growth projections are 2.8% in 2022, 2.1% in 2023, and 2.1% in 2024.
  • Investors should carefully watch Italian bonds to see if the spread between Italian bonds and German bunds widens. If the spread significantly widens, that will be an additional risk for investors to be concerned about.  Of course, we will be watching the spread for you at The Arora Report.

Jobless Claims

Initial claims came at 229K vs. 208K consensus.

Momo Crowd And Smart Money In Stocks

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

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

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

For longer-term, please see oil ratings.

Bitcoin

Bitcoin is range bound.

Markets

Our very, very short-term early stock market indicator is 🔒 as the market direction will depend on how aggressive momo crowd buying is ahead of CPI data tomorrow. 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 $1852, silver futures are at $21.98, and oil futures are $121.57.

S&P 500 futures resistance levels are 4200, 4318 and 4400: support levels are 4000, 3950 and 3860.

DJIA futures are down 96 points.

 

WALL STREET POSITIONED FOR A BIG STOCK MARKET RALLY ON CPI DATA

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

Wall Street Positioning

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 market has been consolidating between support and resistance zones.
  • The chart formation is such that it needs a trigger to break out of the consolidation range. Here is the key question: Will the break be to the upside or the downside?
  • Wall Street has decided that it knows the answer. Wall Street is positioning for a big rally.
  • Here are the next two most important events ahead:
    • European Central Bank (ECB) is meeting tomorrow. ECB has a difficult decision. On one hand it needs to tighten monetary policy to control inflation.  On the other hand, the European economy is slowing.
    • CPI data will be released on Friday at 8:30am ET.
      • Consensus for headline CPI is 0.7%.
      • Consensus for Core CPI is 0.5%.
  • The whisper number on Wall Street for the Core CPI is 0.4%. This is  less than the consensus.
  • Momo crowd uses the hope strategy and buys ahead of the events. In contrast, smart money buys ahead of an event only when there is a high probability and probability adjusted risk reward is favorable. Expect the momo crowd to buy ahead of ECB and ahead of the CPI data release.
  • It is not going to be a cake walk for the momo crowd because many institutional investors continue to take advantage of the rallies to lighten up their positions.
  • Wall Street is not always right, but knowing Wall Street’s positioning can give you a big advantage.  For those who are interested in gaining an advantage by learning about positioning, consider listening to the podcast “Market Mechanics: Positioning.” The podcast is available in the Arora Ambassador Club.

India

The Reserve Bank of India (RBI) raised the key interest rate for the second month in a row. The interest rate was raised by 50 basis points to 4.9%. RBI is promising to withdraw pandemic era accommodations.

Thailand

The Bank of Thailand maintained its key interest rate at 0.5%. However, three members voted to raise the interest rate by 0.25%.

China

In China, there is heavy buying in tech stocks on the news that authorities have approved 60 new video games. This indicates that the “common prosperity” crackdown that began last year is easing.

Hang Seng Tech Index has advanced more than 9% over the last three days.  

See also  BULLS HOPING FOR FIFTH FED DAY RELIEF RALLY, MARKET IGNORES NUCLEAR THREAT

Foreign investors are rushing headlong into Chinese stocks.  

In our analysis at The Arora Report, it is premature to aggressively buy Chinese stocks.

Momo Crowd And Smart Money In Stocks

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

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

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 range bound.

Markets

Our very, very short-term early stock market indicator is 🔒. However, if momo buying does not meet selling, the indicator can quickly turn positive. 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 $1854, silver futures are at $22.06, and oil futures are $120.60.

S&P 500 futures resistance levels are 4200, 4318 and 4400: support levels are 4000, 3950 and 3860.

DJIA futures are down 179 points.

 

TWO VERY DIFFERENT WARNINGS: ONE FROM CHINA AND ONE FROM TARGET

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

Target Warning

Please click here for a chart of Target (TGT).

Note the following:

  • The Morning Capsule is about the big picture and not individual stocks. The chart of Target (TGT) is being used because it has an impact on the overall market.
  • It is very rare for a large company to warn twice in almost three weeks.
  • The chart shows the prior earnings warning from TGT and a new earnings warning.
  • TGT is stuck with inventory that nobody wants.
  • TGT is planning a fire sale to get rid of the inventory that nobody wants.
  • TGT expects its second quarter operating margin will be around 2%.
  • TGT is being optimistic for the second half – it expects an operating margin of about 6%, higher than the pre-pandemic level.
  • TGT expects to maintain or gain market share.
  • You may recall that we have previously pointed out several times that the wrong kind of inventory would become a problem. Now, that is exactly what is happening. The inventory problem is not only limited to TGT but is industry wide.
  • The warning from TGT is impacting the overall market in the early trade.

A Dire Warning From China

A top economist who works for a research group overseen by China’s economic planning agency is suggesting that China should seize Taiwan Semiconductor (TSM) if the US imposes sanctions on China similar to those imposed on Russia. Here are the key points:

  • The person issuing the warning is Chen Wenling. He is the chief economist at China’s Center for International Economic Exchanges. He is an influential person.
  • China is very different from the US. In all likelihood, the warning is approved by the Chinese government, and this is a low key way for the Chinese government to warn the US government.
  • TSM is the largest contract semiconductor manufacturer in the world.
  • TSM has more than 50% market share of the foundry market.
  • To understand the importance of TSM, consider that the chips in your iPhone are made by TSM. If China were to seize TSM, China could stop the supply of chips to Apple (AAPL) and AAPL would not be able to produce iPhones.
  • Since AAPL is a large part of many portfolios, it is important for investors to understand the risks to AAPL.  Such risks are drastically underestimated.  More importantly, Wall Street firms stay silent on the issue because Wall Street firms do a lot of business in China and with AAPL.  Please review the risk reward matrix in the Model Portfolio in ZYX Buy.  Also, consider listening to the in depth podcast on AAPL titled “Stagflation: Buffett’s Portfolio Part 3.”
  • The China Taiwan risk is not discounted in the current stock market price.

Momo Crowd And Smart Money In Stocks

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

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

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 failed to break above $32,000.  The disappointment has caused heavy selling, and now bitcoin is below the psychological level of $30,000.

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 down, and bonds are ticking up.

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 $1846, silver futures are at $21.94, and oil futures are $117.91.

S&P 500 futures resistance levels are 4200, 4318 and 4400: support levels are 4000, 3950 and 3860.

DJIA futures are down 282 points.

See also  INFLATION HOTTER THAN EXPECTATIONS – SMART MONEY SELLS – MOMO GURUS WRONG AGAIN

 

BIGGEST DROP IN AAII STOCK MARKET BEARS SINCE 2010, EXCITEMENT OVER CHINA OPENING

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

Biggest Drop In Bears Since 2010

Please click here for a chart of AAII bull-bear survey.

Note the following:

  • AAII survey is one of the components of The Arora Report proprietary sentiment indicator that we share with you.
  • Bears dropped from 53.5% to 37.1% in one week. This is  the biggest one week drop since 2010.
  • Bulls jumped from 19.8% to 32.0% in one week.
  • The survey respondents are individuals who for the most part neither belong to the momo crowd nor smart money.
  • These newly turned bulls are now buying stocks, helping the stock market run higher.

Bullishness On Transfer Of Wealth To China

Over the years, trillions of dollars worth of wealth have been transferred from the US to China.  The money has come out of the pockets of middle class manufacturing workers in the Midwest.  Many of these workers have been forced out of a comfortable middle class lifestyle.  With an eye on the November elections, the Biden administration is getting more serious about removing about $300B of tariffs on Chinese goods.  In the short term, such a move will reduce  inflation by over 1%.

This is  causing buying in the stock market in the early trade.

China Opening

China is easing COVID restrictions.  This is  the biggest reason for aggressive buying in stocks this morning.  Here are the key points:

  • Buying in US stocks in the early trade on China easing restrictions is mostly focused on speculative momo stocks.  This does not make any sense from a rational point of view because for the most part, these stocks are not impacted by China. The stocks that are impacted by China’s opening are showing only small moves.  The clear interpretation here is that the buying in the early trade is driven by the sentiment in the momo crowd.
  • China appears to be rethinking its “common prosperity” related restrictions on large tech stocks.  It appears that China is being forced to retrace because of its slowing economy.  As a result, there is buying in China in BABA, JD, BIDU, and TCEHY.
  • China has completed its review of ride hailing company DIDI.  DIDI is being delisted.  There is extremely aggressive buying in DIDI.
  • Some China experts are concluding that it is time to aggressively buy Chinese stocks.
  • We have continuously covered China for over 15 years in ZYX Emerging.

Momo Crowd And Smart Money In Stocks

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

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

There are three significant developments in oil:

  • There is bullishness on China opening.
  • Saudi Arabia is raising prices for its Asian buyers.
  • The US has apparently secretly decided to turn a blind eye to Iranian oil exports in violation of sanctions.

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

For longer-term, please see oil ratings.

Bitcoin

Bitcoin is moving up along with aggressive speculative stocks.  Bitcoin has moved to $31,417.  Bulls are hoping for a move about $32,000 as that will trigger several technical buy signals.

Markets

Our very, very short-term early stock market indicator is 🔒 but can quickly turn 🔒.  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 $1856, silver futures are at $22.52, and oil futures are $118.76.

S&P 500 futures resistance levels are 4200, 4318 and 4400: support levels are 4000, 3950 and 3860.

DJIA futures are up 270 points.

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Nigam Arora

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

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.

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