By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Deploy Cash And Reduce Hedges
Consider reducing hedges slowly. Please scroll down to the section “Protection Band And What To Do Now.” Also, consider deploying cash slowly.
Even though inflation is slowing and the technicals of the stock market are positive, do not forget the following:
- The probability of a recession is high.
- Banks are reducing lending.
- Market valuation is high.
- Wall Street earning estimates are too high.
- Over $1.5T worth of loans against commercial real estate will come due by 2025. Many of these loans will be difficult to refinance. Expect foreclosures on commercial properties. This will provide significant opportunities over the next few years.
- The Arora Report analysis is different regarding the Fed compared to the prevailing wisdom in the market. The fact that The Arora Report has consistently been right about the Fed over the last 15 years and the prevailing wisdom in the market has almost always been initially wrong gives us confidence. However, keep front and center Arora’s Second Law of Investing and Trading: “ Nobody knows with certainty what is going to happen next in the markets.”
Core Inflation Sticky
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 that in the premarket, after the release of CPI data, the stock market is slightly above the upper band of the support/resistance zone. So far, the stock market is reacting positively to the inflation data.
- Headline inflation slowed, but core inflation is sticky. Here are the details:
- Headline CPI came at 0.1% month-over-month vs. 0.3% consensus.
- Core CPI came at 0.4% month-over-month vs. 0.4% consensus.
- Headline CPI year-over-year came at 5.0% vs. 5.1% consensus.
- Core CPI year-over-year came at 5.6% vs. 5.6% consensus.
- In The Arora Report analysis, unless there is new data, the Fed is still likely to increase interest rates by 25 basis points one more time and then pause. Keep in mind that the stock market is positioned for no rate hike and as much as 100 basis point cuts during the rest of the year. Understanding market positioning can give you a big edge. For those who are interested in next-level information, listen to the podcast titled “Market Mechanics: Positioning.”
- Fed minutes will be released at 2pm ET and will provide more insights into the Fed’s thinking.
- As an actionable item, the protection band provides the right balance between various crosscurrents. Note that the protection band has changed.
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
Gold is seeing 🔒 on CPI data.
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 inventory came at a build of 377K barrels vs. a consensus of a draw of 1.3M 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 continues to levitate.
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 $2035, silver futures are at $25.64, and oil futures are at $82.09.
S&P 500 futures are trading at 4158 as of this writing. S&P 500 futures resistance levels are 4200, 4318 and 4400: support levels are 4000, 3950 and 3860.
DJIA futures are up 181 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.
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.
