By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Protection Band
Please read this Morning Capsule extra carefully. Make sure you are appropriately situated in the protection band based on your personal preference.
Be ready for a potentially significant change in the protection band based on the data ahead.
Positioning
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 compares SPY to high beta ETF SPHB and low volatility ETF SPLV.
- The chart shows that high beta ETF has outperformed low volatility ETF by 14.98% this year. This is a remarkable divergence during this phase of the economic cycle. In The Arora Report analysis, this remarkable divergence indicates total dominance of bulls over bears in 2023 so far.
- Knowing Wall Street’s positioning can give prudent investors an edge. Different positionings can cause totally different market moves on the same news. To gain in-depth knowledge of positioning, listen to the podcast “Market Mechanics: Positioning.”
- Ahead of the Fed and important earnings, there is remarkable divergence in positioning between the bullish and bearish camps on Wall Street. In our years of observing, such huge divergence is not common.
- Bulls are positioned for a rip-roaring rally to start on top of the rally that has already occurred in January.
- Bears are positioned for a vicious market drop to start.
- FOMC is meeting starting today. The Fed will announce its rate decision at 2pm ET tomorrow, followed by Powell’s press conference at 2:30pm ET.
- Important earnings are ahead.
- Meta (META) will report on Wednesday after the close.
- Apple (AAPL), Amazon (AMZN), and Alphabet (GOOG, GOOGL) will report on Thursday after the close.
- The mother of all reports, the jobs report, will be released on Friday at 8:30am ET.
- Early this morning, there was significant selling in the market on jitters about the Fed. As the morning progressed, the stock market started moving up from the lows on momo crowd buying. At 8:30am ET, buying became aggressive and stock futures turned positive on the release of the Employment Cost Index. The Fed is watching this indicator. The Employment Cost Index came at 1.0% vs. 1.1% consensus.
China
There is encouraging Purchasing Manager Index (PMI) data from China. This is a leading indicator.
- Manufacturing PMI came at 50.1 vs. 49.8 consensus.
- Non-Manufacturing PMI came at 54.4 vs. 52.0 consensus.
- A PMI over 50 indicates that the economy is expanding.
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 was being sold earlier in the morning due to strength in the dollar. After the release of the Employment Cost Index, gold started seeing aggressive buying as the dollar flipped.
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 range bound.
Markets
Our very, very short-term early stock market indicator is 🔒 because of the major divergence in positioning ahead of the Fed. Whichever direction the market starts moving, algos will jump on that direction and significantly exaggerate the move. 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 $1934, silver futures are at $23.48, and oil futures are at $77.29.
S&P 500 futures resistance levels are 4200, 4318 and 4400: support levels are 4000, 3950 and 3860.
DJIA futures are up 79 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.
