80% RECESSION PROBABILITY, MOMO BUYING ON FED SPECULATION AND SCRAPPING OF TRUSS’S TAX CUTS

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By Nigam Arora & Dr. Natasha Arora

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

80% Recession Probability

Please click here for a chart of 10-year minus 2-year Treasuries.

Note the following:

  • The chart shows the yield curve inverted by -0.48%.  This is slightly more than -0.47% in 2000 and -0.43% in 1989.
  • Note from the chart that in 1980 the yield curve inverted by -2.01%.
  • Could the U.S. be heading toward a steeper yield curve inversion?  When the yield curve was more inverted in the 1980’s, it was a period of stagflation.  To learn in advance how to invest during stagflation, listen to the five part podcast series titled “Stagflation: Buffett’s Portfolio.”
  • Based on the yield curve and several other factors that we take into account, the probability of a recession in the U.S. is now 80%.  
  • In The Arora Report analysis, the probability of a recession in Europe is 90%.
  • The momo crowd is aggressively buying stocks on four developments.
    • The dollar is weaker this morning. The momo crowd loves a weak dollar just like they love money printing and free money.
    • In the U.K., Chancellor Hunt is scrapping Truss’s tax cuts and significantly reducing the energy package.  GIlts are rallying.  There is speculation that Truss may not survive as prime minister.
    • There is speculation that the Fed will slow down the pace of rate hikes.
    • Bank of America (BAC) has large consumer deposits and has great insights into consumer behavior.  Bank of America is saying that consumers are flush with cash and continue to spend.
  • In The Arora Report analysis, consumers are still flush with cash because of the leftover free money from government stimulus.  This is not so much the free checks that consumers directly received, but mostly because of trillions of dollars that were injected into the economy during the pandemic.  There is no new free money.  It is only a matter of time until the consumer will stop spending at this rate because more and more people will be concerned about being laid off.  However, this will happen only if the Fed stays on its present course.  If the Fed pivots, the consumer will continue spending and inflation will have difficulty coming down to the Fed’s target of under 2%.
  • While the momo crowd is speculating this morning that the Fed will slow down the pace of rate hikes, St. Louis Fed President James Bullard has suggested that the Fed could consider raising interest rates by 75 basis points in November and then again in December.  Bullard also cautions that it is too early to make the call.  Bullard’s suggestion flies right in the face of the momo crowd’s speculation that is driving up stocks this morning.  
  • This week there are a large number of important earnings.  Bank of America earnings were released this morning.  These earnings are better than expectations.  Other closely watched earnings will be GS, JNJ, TFC, NFLX, ASML, BKR, PG, TRV, WGO, AA, IBM, LRCX, TSLA, T, NUE, WHR, AXP, HCA, SLB, and VZ.
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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 seeing buying along with speculative stocks in the early trade, but bitcoin is still below $20,000.

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 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 $1669, silver futures are at $18.70, and oil futures are at $85.93.

S&P 500 futures resistance levels are 3770, 3860 and 3950: support levels are 3630, 3600 and 3520.

DJIA futures are up 355 points.

Protection Bands And What To Do Now?

It is important for investors to look ahead and not in the rearview mirror.

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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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Picture of 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.

Picture of 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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