WALL STREET JUMPS ON 75 BP BANDWAGON, BUT NEW INFLATION DATA MODERATE

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By Nigam Arora & Dr. Natasha Arora

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

Should You Buy Stocks Today?

Start out with Arora’s Third Law: Making investing and trading decisions based on probabilities is the only realistic and profitable approach.

Investors should think in terms of probability adjusted risk reward ratio.

The momo crowd often buys before the Fed meeting.  The market is setup such that whichever direction it starts moving, both machines and the momo crowd will aggressively go in that direction.  As a result, there can be a violent move in either direction.  For long term positions, the best course of action is summarized in the “Protection Bands And What To Do Now” section below.

Based on probability adjusted risk reward, it is not prudent to start very long term positions until there is more clarity or there is capitulation and a buy signal given.

Short term trades are fine.

Producer Price Index 

Please click here for a chart of Fed Funds futures (ZQ_F).

Note the following:

  • As usual, The Arora Report was ahead of Wall Street.  On June 10 we wrote,

The probability has increased that the Fed may have to raise interest rates by 75 basis points.

  • Wall Street has now jumped on the 75 basis point band wagon.
  • The chart shows that Fed Funds futures are now predicting a 75 basis point rate hike.
  • According to one bank, the risk of a 100 basis point rise is not trivial.
  • Events move fast.  Producer Price Index (PPI) released this morning may moderate the 75 basis point view.  Here are the details:
    • Headline PPI came at 0.8% vs. 0.8% consensus, but the whisper numbers were higher; prior was revised to 0.4% from 0.5%.
    • Core PPI came at 0.5% vs. 0.6% consensus; prior was revised to 0.2% from 0.4%.
  • Stock futures jumped on the PPI data hoping for a 50 basis point hike.
  • Powell is in a tough spot.  He previously stated that the hike would be 50 basis points and rejected 75 basis points. If he does not go with 75 basis points, he will be accused of not being tough on inflation. If he goes with 75 basis points, Powell will be accused of not properly communicating beforehand.
  • In our analysis, more important than the amount of the hike will be the forward guidance, especially about the terminal rate.

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 🔒 gold in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see gold and silver ratings.

Oil

Oil production in Libya has lost 1.1M bpd as nearly all oil fields are shut down.  The shut downs are due to new violence between two political factions.  Oil is moving on the news. 

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

On May 15, Nigam was quoted in Business Standard:

Nigam Arora, a US-based financial market and algorithm expert and author of The Arora Report, said, “The Bitcoin is highly correlated to long-duration speculative tech stocks on the Nasdaq. Typically, many investors own both. Long-duration tech stocks have been crushed due to the US Federal Reserve (Fed) raising interest rates.  In the short term, the Bitcoin will attempt to rally because it is oversold.  However, MicroStrategy’s huge hoard of Bitcoin (average cost $30,000) is a sitting duck because MicroStrategy will receive a margin call if Bitcoin falls below $21,000.  The bears will try to drive Bitcoin below $21,000.”

At the time of the quote, bitcoin was trading at $31,280.  Our call was that $21,000 was the target.  Bitcoin has now hit $21,000, and the call has proven spot on.

MicroStrategy (MSTR) may need to post additional collateral to maintain the loans it has taken out to buy bitcoin.  

Markets

Our very, very short-term early stock market indicator is 🔒 because of moderating PPI number and momo crowd 🔒 in the morning.  However, based on the rumors about the Fed’s move tomorrow, the indicator can quickly turn down.  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 after a major rise in interest rates yesterday.

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 $1822, silver futures are at $21.23, and oil futures are $122.97.

S&P 500 futures resistance levels are 3860, 3950 and 4000: support levels are 3770, 3630 and 3600.

DJIA futures are up 105 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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This post was just published on ZYX Buy Change Alert.

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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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