GOOD NEWS ON INFLATION, BUT FED MAY NOT BUCKLE

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By Nigam Arora & Dr. Natasha Arora

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

Good News

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:

  • There is good news on inflation.  Here are the details of the CPI data:
    • July CPI came at 0.0% vs. 0.2% consensus month over month.
    • Core CPI came at 0.3% vs. 0.5% consensus month over month.
    • CPI rose 8.5% in July year over year.
    • Investors should focus on month over month numbers and not on year over year numbers.
  • Investors should be mindful of what we wrote in yesterday’s Morning Capsule.

In this case, history may help. With the benefit of hindsight, in the 1970’s, the Fed made the mistake with its stop and go policy.  The Fed would ease when inflation data would become better and tighten when inflation data would get worse. The policy resulted in raging inflation in the 1980’s.  The Fed officials are aware of the mistake of the 1970’s.  Here is the key question, “Do the Fed officials have the fortitude and foresight to not repeat the mistake of the 1970’s?”

  • The probability is high that the Fed will raise rates in the September meeting.  Rents are a big part of CPI.  Rents are spiking up and will likely show up in CPI over the coming months.  Wage inflation is slowing down in certain sectors of the economy such as information technology, but it is likely to continue in other sectors of the economy, especially for blue collar workers.  In information technology, there is anecdotal evidence of employers laying off expensive workers with plans to replace them with cheaper workers.
  • The odds of a recession have gone down, but still stand at 70%.  
  • Earnings are still likely to take a hit in the future quarters.
  • Investors also need to be aware of seasonality.  September and October tend to be weak months.
  • Investors also need to pay attention to positioning.
    • The momo crowd is positioned for a big rally from here, but may have already deployed much of the cash.
    • Smart money is holding significant amounts of cash but may be reluctant to deploy cash.
    • Fund managers do have cash and may hold their noses and buy to keep up with their benchmarks.
  • The chart shows that in the short term the market is overbought.  Overbought markets tend to be vulnerable to pullbacks.
  • The chart shows that the resistance zone is ahead.
  • The chart shows that the rally has been on low volume.  This is a negative.
  • There will be adjustments to the protection bands in a gradual, careful manner.
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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

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 seeing buying on CPI number.

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 significantly 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 $1811, silver futures are at $20.58, and oil futures are $90.52.

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

DJIA futures are up 447 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.

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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

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.

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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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