By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Hotter Core CPI
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 chart shows a slight pullback in the stock market after the release of CPI this morning.
- The chart shows that the stock market has made a double top in the resistance zone. In the short term, this is a negative pattern.
- The chart shows that the stock market is consolidating between the support zone and resistance zone.
- RSI on the chart shows that the stock market has bounced from being very oversold and is now situated such that it can go either way.
- Core inflation data at the consumer level came hotter than expected. Here are the details:
- Headline CPI (Consumer Price Index) came at 0.2% vs. 0.2% consensus.
- Core CPI came at 0.3% vs. 0.2% consensus.
- In theory, if the Fed was truly objective, the Fed would wait and not cut interest rates in September due to hotter core inflation.
- The market consensus is a 50 bps cut in September.
- In The Arora Report analysis, based on the CPI data, at a minimum the Fed should not cut by 50 basis points in September and certainly no more than 25 basis points. Having said that, we have seen it again and again, that the Fed decides what it wants to do first and then tries to justify it as opposed to letting the data shape the decision. As we have written before, Powell is itching to cut rates. Here, the Fed has a ready excuse to cut rates by citing its double mandate – maximum employment and price stability. Since the labor market is weakening, the Fed may decide to ignore the price stability part of its mandate and justify a rate cut based on labor.
- In The Arora Report analysis, what the Fed does has major implications for the stock market, especially AI stocks.
- Of note is that the yields on long bonds are rising after the release of CPI data. Over the last couple of days, the momo crowd has aggressively been buying bond futures on leverage. These highly leveraged positions are losing money this morning. Unless bonds recover, there may be a negative impact on the stock market.
- In the early trade, the momo crowd is ignoring the data and aggressively buying the slight dip in AI stocks. The buying in AI stocks is due to front running a speech by Nvidia’s Jensen Huang. The buying is especially aggressive in Nvidia (NVDA).
- The yen rallied on comments from Bank of Japan (BOJ) official Junko Nakagawa. As the yen rallies, there is more concern about the carry trade. The most popular carry trade has been borrowing funds in Japan to invest in AI stocks in the U.S.
- In The Arora Report analysis, the rise in the yen may stop, and the yen may even weaken as investors digest the new CPI data.
- Sentiment is very positive.
- As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the protection band. The protection band is one of the large number of unique edges that are available to members of The Arora Report.
Magnificent Seven Money Flows
In the early trade, money flows are positive in Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Nvidia (NVDA), Alphabet (GOOG), and Meta (META).
In the early trade, money flows are negative in Tesla (TSLA).
In the early trade, money flows are neutral in S&P 500 ETF (SPY) and positive Nasdaq 100 ETF (QQQ).
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.
Note for new members: Smart money often sells into the strength generated by momo crowd buying and buys into the weakness generated by momo crowd selling. Over a long period of time, investors come out ahead by adopting smart money’s ways. The exception is in a raging bull market – for very short term trades, consider following the momo crowd and not smart money.
Gold
Gold is seeing selling on hotter core CPI.
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 is very oversold.
API crude inventories came at a draw of 2.79M barrels vs. a consensus of a build of 0.7M barrels.
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 (BTC.USD) was sold after the presidential debate on Harris doing well. Bitcoin bulls are hoping for a Trump win as Trump has closely aligned himself with bitcoin. Large amounts of money from crypto whales appear to be flowing into Trump’s campaign.
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 up, bonds are ticking down.
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 $2537, silver futures are at $28.89, and oil futures are at $66.93.
S&P 500 futures are trading at 5501 as of this writing. S&P 500 futures resistance levels are 5622, 5748, and 5748: support levels are 5400, 5256, and 5210.
DJIA futures are down 136 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.
A protection band of 0% would be very bullish and would indicate full investment with 0% in cash. A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.
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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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.
