By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
CPI Angst
Please click here for a chart of services Consumer Price Index (CPI) less shelter.
Note the following:
- The chart shows that services CPI less shelter has come down on a month-over-month basis.
- The Fed is most concerned about services CPI less shelter for the following reasons:
- The consumer is on a binge to consume services.
- Job growth in services is very strong.
- Wage hikes in services are proving to be sticky.
- Cleveland Fed’s model is predicting January Core CPI at 0.46% month-over-month and headline CPI at 0.63% month-over-month.
- In The Arora Report analysis, as we have written before, bringing inflation down to about 4% is an easy task; bringing inflation down from 4% to 2% may prove much harder. If our analysis is correct, the Fed will end up keeping interest rates higher for longer. Right now, the market is expecting as many as two interest rate cuts in 2023.
- After rushing headlong to aggressively buy stocks, yesterday midmorning, the momo crowd woke up to the possibility that CPI may come out stronger than expected. There is anecdotal evidence that there has been significant buying by retail investors on margin. The momo crowd selling from yesterday is continuing in the early trade today.
- Investors who follow traditional technical analysis were rushing headlong to buy stocks on technical signals. These technical investors were not envisioning yesterday’s selloff. They are selling this morning on concerns that their signals might be false.
- Prudent investors should start with Arora’s Second Law of Investing and Trading: Nobody knows with certainty what is going to happen next in the markets. After analyzing all of the data that gives us indications about CPI, in The Arora Report analysis, the probability of CPI coming better or worse than the consensus is about evenly split.
- Investors should keep in mind that if CPI is better than expected, the momo crowd will be back again, aggressively buying stocks.
- In The Arora Report analysis, the Fed is not going to be swayed by one month’s number coming better than expected. The Fed is going to want to see numbers coming better for several months in a row.
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
In a surprise, Russia is cutting its oil output by 500K barrels per day. As a result, oil prices are rising this morning.
The momo crowd is 🔒 oil in the early trade. Smart money is 🔒 oil in the early trade.
For longer-term, please see oil ratings.
Bitcoin
The SEC is cracking down on staking. In staking, certain crypto holdings like Ethereum are borrowed from holders to validate crypto transactions. Crypto holders get returns as high as 21%.
Mom and pop are attracted to staking for high returns without understanding that staking often ends up as a way for whales to fleece mom and pop.
Now, the SEC is cracking down on staking. It has charged the popular exchange Kraken with selling unregistered securities. In response, Kraken is shutting down its staking service in the U.S. but will continue to offer it outside the U.S. Kraken is also to pay a $30M fine.
Bitcoin is lower on SEC crackdown on staking.
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 and bonds are range bound.
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.
Gold futures are at $1878, silver futures are at $22.15, and oil futures are at $78.84.
S&P 500 futures are trading at 4072 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 down 73 points.
Protection Bands 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.
