BULLS HOPING FOR FIFTH FED DAY RELIEF RALLY, MARKET IGNORES NUCLEAR THREAT

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By Nigam Arora & Dr. Natasha Arora

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

Relief Rally

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 FOMC meeting concludes today.  The policy statement will be released at 2pm ET.  Powell’s press conference will follow at 2:30pm ET.
  • The chart shows that the market is at the top of the support zone.
  • The chart shows that RSI is sloping down, and the market is close to oversold.
  • So far, the Fed has raised rates four times in 2022.  Every time, the momo crowd has run the market up.  Here are the details:
    • After the 25 bps hike on March 16, S&P 500 rose 2.24%.
    • After the 50 bps hike on May 4, S&P 500 rose 2.99%.
    • After the 75 bps hike on June 15, S&P 500 rose 1.46%.
    • After the 75 bps hike on July 27, S&P 500 rose 2.62%.
  • Due to its importance, it is worth repeating what we wrote in yesterday’s Morning Capsule,

The positioning is negative going into the Fed meeting.  For this reason, it will take only a tiny move up for the algorithms to start buying.

  • For those who want next level knowledge on positioning, consider listening to the podcast titled “Market Mechanics: Positioning To Gain An Edge.”
  • The chart shows the market is below the algo selling line, shown in red.
  • Markets are complex and multidimensional.  Prudent investors need to be mindful of two very important points.  
    • In The Arora Report analysis, Wall Street’s earnings estimates are too high.  As earnings estimates come down, it will put downward pressure on the stock market.  
    • In The Arora Report analysis, PE multiple for stocks is still too high for the current conditions.  Unless the Fed backs off from fighting inflation or there is a dramatic reduction in inflation, PE multiple is likely to contract.  
    • These two important points show that there is significant downside risk to this market.  
  • While the momo crowd is focused on running the market up, smart money appears to be focused on the projections from the Fed of the future.
    • The dot plot shows projections for the Fed funds rate.
    • Smart money will be looking at dot plot and other indications of the terminal Fed rate.
    • The last projections on the dot plot from Fed officials are from June. At that time, most officials were below 4%.
    • Right now, the bond market is pricing the terminal rate of 4.5%.
  • Start with Arora’s Third Law of Investing and Trading.  The Third Law states, “Making investing and trading decisions based on probabilities is the only realistic and profitable approach.”
    • Prudent investors need to be aware that in The Arora Report analysis, there is about 30% probability that the terminal rate could go to 5%.  If the Fed funds rate goes to 5%, the stock market will likely fall below the “not mother of support zones” shown on the chart.
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Nuclear Threat

Putin has raised the specter of a nuclear response in Ukraine.  The market has ignored the threat, but prudent investors should take the threat seriously.

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

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

Oil

API reported 1.035M barrels build vs. 2.321M barrels consensus.

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 remains under the $20,000 psychological threshold.

Markets

Our very, very short-term early stock market indicator is 🔒 but may turn 🔒 on the Fed announcement and Powell’s remarks.  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 $1683, silver futures are at $19.64, and oil futures are at $85.36.

S&P 500 futures resistance levels are 3950, 4000 and 4200: support levels are 3860, 3770 and 3630.

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DJIA futures are up 142 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

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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