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 Microsoft stock (MSFT).
Note the following:
- The Morning Capsule is about the big picture, not an individual stock. The chart of Microsoft is being used to illustrate the point.
- The chart shows that Microsoft stock has taken three legs up this year on an artificial intelligence frenzy related to ChatGPT.
- Investors have bid up Microsoft’s stock as shown on the chart in spite of significant deterioration in its business in the same way investors have bid up Apple (AAPL) stock in spite of Apple being on track for declining revenues three quarters in a row.
- Just like Apple, Microsoft is an expensive stock. Microsoft is trading at a PE of over 33, and Apple is trading at a PE of over 28.
- Microsoft has over $104B cash on its balance sheet.
- Prudent investors should pay attention that this market is levitating primarily because of investors running up large caps such as Microsoft, Apple, Meta (META), Google (GOOG, GOOGL), Amazon (AMZN), and Nvidia (NVDA). With the exception of Nvidia, the business of all of these companies is deteriorating. The market is safer when the strength is broad based and stock prices are aligned with strengthening business; this is not the case now.
- Today, Microsoft has introduced a new wrinkle. In spite of being cash rich and having an expensive stock that Microsoft can use as a currency, Microsoft is going to finance its shift to artificial intelligence, in part by not giving its employees raises. This is after thousands of layoffs.
- Expect the pause on raises to spread across Information Technology.
- Inflation at the producer level has eased. This is good news. Here are the details:
- Headline PPI came at 0.2% vs. 0.3% consensus.
- Core PPI came at 0.2% vs. 0.3% consensus.
- Initial jobless claims came at 264K vs. 247K consensus. From the data we publish every week, readers will notice that initial claims have significantly jumped up. This is a leading indicator and carries heavy weight in our adaptive ZYX Asset Allocation Model with inputs in ten categories. Our model has proven itself over a long period of time in both bull and bear markets. One of the reasons that the model is so successful is that it automatically changes in response to market conditions. Most models used on Wall Street are static; they work for a while and then stop working when market conditions change. Please click here to see how the adaptiveness is achieved.
- Expect a tug of war between the bears and bulls on the latest jobless claims data. Expect bulls to claim that the latest data is good news as it will force the Fed to lower interest rates. Expect bears to contend that the data is bad news because it will ultimately negatively impact earnings.
- For most investors, it should only be a matter of common sense. Tech workers are already feeling insecure because of layoffs. Now, they are not going to get raises. Do you expect workers to continue spending at the same rate that they have been?
- There is bad news on regional banks again. Deposits have been flowing out of PacWest (PACW). Western Alliance (WAL) says that its deposits are stable. Nonetheless, several regional bank stocks are being hit.
- As an actionable item, the sum total of the foregoing is summed up in the protection band below.
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.
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.
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 $2039, silver futures are at $24.90, and oil futures are at $71.32.
S&P 500 futures are trading at 4137 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 194 points.
Protection Band 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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