By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
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:
- At a time when those following traditional technical analysis and the momo crowd are putting all their eggs in the immaculate landing basket, and even bearish money managers are holding their noses and buying, prudent investors should consider not putting all their eggs in the immaculate landing basket.
- The probability of an immaculate landing is only about 25%.
- The chart shows that in the early trade, the market has pulled back into the support/resistance zone.
- Even though bulls are disappointed that the market has not continued to go straight up and bears are taking comfort from this pullback, the fact is that such pull backs are often common in a strong bull run. Is this a strong bull run or a head fake? This is yet to be decided as there are many potential outcomes based on macro analysis. Those who have been reading the Morning Capsule regularly know that good macro analysis has worked well a vast majority of the time.
- RSI on the chart shows that the market has pulled back to relieve the very overbought condition.
- Prudent investors should keep an eye if the market drops below the low band of the support/resistance zone. Such a drop will increase the probability that this stock market rally is a head fake. On the other hand, a quick reversal above the top band will increase the probability of another stock market rally leg.
- The following are the major factors in the recent data that have dramatically increased the probability of an immaculate landing:
- The expectation was that financial conditions would remain tight due to the Fed raising interest rates. However, relentless buying in the stock market by the momo crowd have eased financial conditions. Financial conditions are looser now than they were before the Fed started raising rates.
- During the pandemic, the government overstimulated the economy with free money or almost free money programs. The result of overstimulation was that consumers got in the habit of overspending. Habits are hard to break. Consumers are continuing to overspend relative to their present incomes.
- It was assumed that by now the money from free programs would have been spent, but that is not the case. Checking account balances are still higher than what they were before the pandemic. This piece of data indicates that consumers will continue to overspend at least for a while.
- Technology companies have engaged in larger layoffs than expected. This is going to help their earnings.
- Normally layoffs impact the unemployment rate and jobless claims. However, there are two different factors at play at this time.
- Those affected by technology layoffs are disproportionately foreign workers on work visas. Many such workers will end up going back to their home countries.
- Many workers that are being laid off from tech companies are finding jobs in other sectors of the economy, albeit at lower salaries.
- Overnight shares in China and several Asian markets, with the exception of Japan, were lower on the U. S. shooting down China’s spy balloon.
- Selling from Asia continued to Europe and from Europe to the U. S. in the early trade.
- There are reports that China will retaliate against the U. S. for the shooting down of their balloon. There is speculation that China may shoot at U. S. planes that routinely touch Chinese airspace. If China does retaliate, it will be a negative for the stock market.
- Of note is that Treasury yields are rising this morning. Bulls will interpret it as further proof that immaculate landing is coming. On the other hand, bears will interpret it to indicate the rally driven by the lower yields is over.
Layoffs in the tech sector continue.
Dell, the PC maker, is laying off about 6600 employees, about 5% of its workers.
Momo Crowd And Smart Money In Stocks
The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) in the early trade. Smart money is 🔒 in the early trade.
The momo crowd is 🔒 in the early trade. Smart money is 🔒 in the early trade.
For longer-term, please see gold and silver ratings.
The momo crowd is 🔒 oil in the early trade. Smart money is 🔒 in the early trade.
For longer-term, please see oil ratings.
Bitcoin is range bound. Bulls are disappointed that whales did not take advantage of the low liquidity on Friday night to run it up.
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, 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 $1886, silver futures are at $22.38, and oil futures are at $73.84.
S&P 500 futures are trading at 4118 as of this writing. S&P 500 futures resistance levels are 4200, 4318 and 4400: support levels are 4000, 3950 and 3860.
DJIA futures are down 173 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 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 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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