By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
A Smart Move Or Jumping The Gun?
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 all important Consumer Price Index data will be released tomorrow at 8:30am ET.
- In yesterday’s Morning Capsule we wrote,
CPI data has the potential to be a binary event.
Bulls are contending that the CPI data will show lower inflation and trigger one of the biggest stock market rallies ever.
- This morning, the momo crowd is buying stocks in anticipation of good CPI data.
- In our analysis, there is a fair probability that the momo crowd may turn out to be right. However, the probability is not strong enough to provide a favorable probability adjusted risk reward ratio to jump the gun and buy ahead of the data. There is no smart money buying. As we have shared with you before, the momo crowd focuses only on the rewards and not on the risks – if you do not consider the risks, there is potentially high reward in buying ahead of the data. In contrast to the momo crowd, the smart money takes into account risk first and reward second.
- Investors need to be careful even if the CPI data is good. In our analysis at The Arora Report, the most likely scenario is for inflation to slow, but inflation is still way above the 2% target of the Fed. Moreover, the wages that have already risen are going to have a difficult time going back.
- Biden is going to speak about inflation. Bulls are excited that Biden may be able to soothe their nerves.
- The chart shows that yesterday the market fell below the low band of the support zone and then recovered on short covering.
- Investment gurus continue to teach to put stops below key levels. They do not think in terms of zones and put the entire quantity at one price. The sheep continue to follow.
- S&P 500 4000 is a key level, and many stops were put right below it. This is like locking the door to your house and putting the key under the doormat. Smarter players know that the stops of the less informed investors are like a sitting duck. Such stops were taken out yesterday. After the stops were taken out, the selling pressure disappeared and helped the market rise.
- Many gurus are claiming that yesterday formed the bottom. Note from the chart that the volume was heavier but not heavy enough to be consistent with the bottom.
- VIX and many other indicators do not indicate the bottom.
- Due to very oversold conditions, a quick snap back rally in stocks may occur. However, the lasting power of the rally will depend on the CPI data tomorrow.
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 🔒 in the early trade.
For longer-term, please see oil ratings.
Bitcoin
Bitcoin is bouncing along with speculative stocks.
Markets
Our very, very short-term early stock market indicator is 🔒but may reverse due to Biden’s speech and also speeches from several Fed members ahead. 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 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 $1858, silver futures are at $21.81, and oil futures are $102.80.
S&P 500 futures resistance levels are 4200, 4318 and 4400: support levels are 4000, 3950 and 3860.
DJIA futures are up 291 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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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 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.
