WALL STREET’S FEAR GAUGE LOWEST SINCE NOVEMBER 2019 AHEAD OF THE FED, PPI BETTER THAN CONSENSUS

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By Nigam Arora & Dr. Natasha Arora

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

Fear Evaporates

Please click here for a chart of CBOE Volatility Index (VIX).

Note the following:

  • The chart shows that VIX has fallen to the lowest levels since November 2019. VIX is also known as Wall Street’s fear gauge.
  • Fear has evaporated as market mechanics have taken over.
  • When market mechanics drive the stock market higher, VIX hitting a low is inline with pre-pandemic historical patterns.
  • From historical patterns, when fear completely evaporates, often some event comes along that causes the stock market to drop.
  • Producer Price Index (PPI) came better than the consensus but inline with The Arora Report analysis.  Here are the details:
    • Headline PPI came at 0.0% vs. 0.1% consensus.
    • Core PPI came at 0.0% vs. 0.2% consensus.
  • We have been sharing with you for a while that inflation is coming down sharply in goods.  We wrote, only two days ago:

In The Arora report analysis, since the U.S. is a huge importer of Chinese goods, deflation in China is helping inflation in the U.S. come down.

  • As we have been sharing with you, in The Arora Report analysis the problem with inflation is in services.
  • The FOMC rate decision will be announced at 2pm ET followed by Powell’s press conference at 2:30pm ET.
  • Ahead of the Fed, over the last month investors have bought stocks, bonds, and bitcoin aggressively by making a bet that the Fed will cut interest rates five times in 2024 with the first rate cut coming in March.  We will be carefully analyzing the FOMC statement and Powell’s press conference to see if the Fed pushes back against investors running ahead of the Fed.  Long time readers of The Arora Report know that this is the pattern of the momo crowd, that they always run ahead of the Fed.  A vast majority of the time, the momo crowd has been wrong, but that does not stop them from repeating the same pattern again and again.  The reason this pattern exists is that momo gurus’ real job is to push up the stock market in the short term, without any concern for the long term.  Momo gurus disguised as analysts or strategists are very good at their job.  Momo gurus know that nothing excites the momo crowd more than rate cuts.
  • In The Arora Report analysis, the Fed is in a difficult position.  The data from the Fed already indicates two rate cuts in the second half of next year.  If Powell is dovish or the Fed goes to three rate cuts, momo gurus will start pushing eight rate cuts next year and that will drive the stock market higher.  On the other hand, if the Fed and Powell push hard against the notion of five rate cuts next year, momo gurus will come out in full force with two narratives: fight the Fed and do not believe the Fed.
  • Prudent investors need to be aware that over the last two years there have been several times when these two narratives from momo gurus did not work and the stock market pulled back.
  • 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.
See also  BUYING IN THE STOCK MARKET ON TAMER PPI AND ECB SIGNAL

54% Devaluation

Argentina has devalued its currency by 54%.  The new president is engaged in massive cuts.  Economy Minister Luis Caputo said, “There is no more money.”  Foreign investors have rushed into Argentina making a bet that austerity will work.

As we have written before, there is a potential opportunity to make significant money in Argentina.  A signal to buy Argentina may be coming.  When the data supports it, a signal to buy Argentina will be in ZYX Emerging.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), and  Alphabet (GOOG).

In the early trade, money flows are negative in Nvidia (NVDA), Meta (META), and Tesla (TSLA).

In the early trade, money flows are positive in S&P 500 ETF (SPY) and 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.

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

API crude inventories came at a draw of 2.3M barrels vs. a consensus of a draw of 1.5M 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) has stabilized over $40,000.  To keep investors excited, bitcoin promoters are claiming that bitcoin will resume its run after the Fed announcement.  Prudent investors should note that bitcoin promoters are always certain of the future.

See also  WEEKLY STOCK MARKET DIGEST: AI ENTHUSIASTS, STOCK MARKET MOMO CROWD, AND THE FED IGNORE HOTTER INFLATION

Markets

Our very, very short-term early stock market indicator will depend on the Fed.  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 $1998, silver futures are at $23.02, and oil futures are at $69.35.

S&P 500 futures are trading at 4707  as of this writing.  S&P 500 futures resistance levels are 4713, 4770, and 4826: support levels are 4600, 4460, and 4400.

DJIA futures are up 75 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.

See also  ISRAEL KILLS TOP IRANIAN GENERAL – OIL RISES – NOT GREAT FOR STOCK MARKET’S NO INFLATION STORY

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 seven 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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This post was just published on ZYX Buy Change Alert.

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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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