By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Stagflation Risk Rises
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 this morning the stock market is again approaching the low band of support zone 1.
- The chart shows that the rally from recent lows failed just after crossing the 200 day moving average. When the stock market crossed above the 200 day moving average, legions of investors who believe in the myth of the 200 day moving average turned bullish. Those investors have now been whipsawed.
- The chart shows that the stock market is now retesting the recent lows. Retesting the recent lows is quite common. The real question is will the retest succeed or fail.
- Momo gurus claim to already know the answer to the question. Momo gurus are contending that the retest will be successful and the stock market will launch a new rally. Prudent investors should keep in mind that momo gurus are wrong most of the time and momo gurus’ real job is to persuade their followers to buy stocks.
- RSI on the chart shows the stock market has lost internal momentum. There is room for the stock market to go lower.
- If it was not for aggressive buying due to market mechanics, this morning the stock market would have likely broken below support zone 1, falling rapidly towards support zone 2. Market mechanics continue to be to the upside with one exception. The exception is that if the stock market falls more going into 10am ET, expect many momo crowd accounts to be hit with margin calls.
- Expect quarter end rebalancing money flows to be very positive the rest of the day.
- Along with other data we have been sharing with you, the economic data released Friday related to University of Michigan consumer sentiment as well as the Fed’s favorite inflation gauge PCE is highly concerning. Please see Friday’s Morning and Afternoon Capsules for details.
- The data from last week indicates stagflation. It is important for prudent investors to not get carried away based on data from only one week. It is important to wait for more data. In the meantime, it is important for investors to start learning about stagflation urgently.
- It is important to learn to close the barn door before the horse bolts. There is potential for the data to turn nasty very quickly. If the data turns nasty and stagflation is sustained, a vast majority of investors will lose a significant amount of money. The reason is that by the time they recognize what is happening, the horse would have already bolted and it would be too late to close the barn door.
- Closing the barn door is one of the most difficult tasks investors face. This is the reason it is very important to start learning how to close the barn door now.
- Here are the reasons closing the barn door is difficult:
- The only example of stagflation is from the 1970’s and 1980’s.
- If stagflation occurs now, it will be very different from the stagflation of the 1970’s and 1980’s.
- In the public domain, there is a ton of information on stagflation – unfortunately, it is all driven by the experience of the 1970’s and 1980’s. There is nothing good out there that credibly looks forward to a totally different kind of stagflation that we may experience. Moreover, there is a lot of good theory out there, but there is almost nothing that in a practical way can guide investors.
- The current deficit and national debt will make it very difficult to tackle stagflation if it persists. Keep in mind that when unfunded liabilities are taken into account, the national debt now stands at $1.34M for every household in the U.S.
- At The Arora Report, we are working on models to not let the scrooge of stagflation drain your portfolios, and at the same time, enhance your wealth. The difficulty is that the investments that will protect your portfolio from stagflation are precisely the investments that will be hurt if President Trump continues with the current policies. This makes learning in advance even more critical.
- To benefit investors, an example from 2007 is in order. In 2007 when Wall Street was ultra-bullish, The Arora Report call was that a crash was coming. In the 2008 great financial crash, the S&P 500 lost 50% of its value, and most portfolios lost 70% – 80% of their value. The Arora Report’s protection band was at 100%. Through the judicious use of inverse ETFs, tactical trades, and short selling, The Arora Report produced returns of 40+%. The Arora Report is not predicting a crash at this time. However, the reference of 2007 is important because with the same signals from The Arora Report, the individual performance of members differed dramatically. Those who built up their knowledge quickly understood The Arora Report’s signals, followed them, and did well. Those who did not build up their knowledge received the signals, did not follow them, and suffered losses.
- Based on the 2007 experience, in order to help all members of The Arora Report build their knowledge, especially since there is nothing in the public domain that guides investors in a practical manner looking forward, we are taking an unusual step. We are opening up Arora Ambassador Club to new members, but only for two more days. If you are interested, please write to ambassador@TheAroraReport.com. There is a podcast series titled “Stagflation: Buffett’s Portfolio” that analyzes all 41 stocks in Warren Buffett’s portfolio in the context of modern day stagflation. This podcast series gives investors practical guidance. More podcasts on stagflation will be forthcoming.
- In The Arora Report analysis, here are the current probabilities:
- The probability of stagflation if President Trump continues with present policies is at 70%. Keep in mind that many of President Trump’s policies are good for the stock market in the long term. It is the short to medium term that is a problem for the stock market. At The Arora Report, our objective is to help you protect your portfolio and take advantage of the dislocations to be well positioned for the long term.
- The probability of a recession is at 40%.
- The probability of a depression is at 5%.
- Apple (AAPL) is working on an AI doctor. Apple is looking to recruit celebrity doctors. How AAPL stock responds to this news will be one of the tells of the stock market’s sentiment.
- 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 negative in Amazon (AMZN), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG), Meta (META), Tesla (TSLA), and AAPL.
In the early trade, money flows are negative 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 *** stocks 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.
Very Very Short-Term Indicator
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.
Gold
The momo crowd is *** gold in the early trade. Smart money is *** gold 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 (BTC.USD) is seeing selling.
Markets
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.
S&P 500 futures are trading at 5575 as of this writing. S&P 500 futures resistance levels are 5622, 5748, and 5926: support levels are 5500, 5400, and 5256.
DJIA futures are down 278 points.
Gold futures are at $3153, silver futures are at $34.72, and oil futures are at $69.71.
Protection Band And What To Do Now
It is important for investors to look ahead and not in the rearview mirror. The proprietary protection band from The Arora Report is very popular. The protection band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.
Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding *** in cash, Treasury bills, short term fixed income, 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.
