By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
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 the stock market has moved above the top band of the support/resistance zone. Considering the recent history of the market, this is a big deal.
- The move above the top band is a buy signal in traditional technical analysis. Expect those who exclusively follow technical analysis to buy stocks aggressively.
- The pattern of RSI shown on the chart is positive. Stock market bulls are euphoric. Powell gave bulls an unexpected gift by not slapping them.
- On January 30, prior to the Fed meeting, we wrote in the Morning Capsule:
Based on all of the data we analyze, in The Arora Report analysis, the following is the appropriate course of action for the Fed.
Raise interest rates by 25 basis points.
Continue with quantitative tightening at the present pace.
Announce that any future rate hikes will be data dependent.
Announce that the Fed will patiently wait to see the impact of massive rate hikes so far.
Announce that the Fed does not intend to cut rates until it is convinced that not only will inflation move towards its target of 2% but also that inflation will not come back.
- The Arora Report call on what the Fed should do has proven spot on.
- Stock market bears were confident that Powell would slap the momo crowd like he did in the past.
- To the total surprise of bulls and bears, not only did Powell not slap the momo crowd, he perhaps unwittingly encouraged the momo crowd.
- The totally unexpected behavior from Powell illustrates the value for investors of following Arora’s Second Law of Investing and Trading: Nobody knows with certainty what is going to happen next in the markets.
- Bears have been crushed but stay firm to their conviction. Bears are pointing out that now the market is trading at a trailing PE ratio of 22.69 and a forward PE ratio of 19.96. With the latest rally, from a valuation perspective, this is an expensive market.
- Bulls are countering that valuation does not matter because momentum is on their side.
- The economic data released this morning is positive.
- Initial jobless claims came at 183K vs. 201K consensus.
- Q4 Unit Labor Costs – Preliminary came at 1.1% vs. 1.5% consensus.
- Q3 Productivity – Preliminary came at 3.0% vs. 2.5% consensus.
- Noteworthy among earnings are oil major Shell (SHEL) and Facebook owner Meta (META). SHEL reported record profits more than doubling profits in 2022 compared to 2021. META reported solid revenues and is indicating discipline to cut costs.
- After the close are important earnings from Apple (AAPL), Amazon (AMZN), and Alphabet (GOOG, GOOGL).
The European Central Bank (ECB) raised its interest rates by 50 basis points. ECB is indicating that it is intending to raise interest rates by another 50 basis points at the next meeting.
Bank of England (BoE) raised its key interest rates by 50 basis points. BoE is indicating that inflation has likely peaked.
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.
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.
OPEC+ to leave production quotas unchanged.
The momo crowd is 🔒 oil in the early trade. Smart money is 🔒 in the early trade.
For longer-term, please see oil ratings.
Bitcoin is being bought along with speculative stocks.
Our very, very short-term early stock market indicator is 🔒 but expect the market to open 🔒. Expect big up moves in tech stocks. 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 range bound after a drop on Powell’s press conference.
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 $1958, silver futures are at $24.57, and oil futures are at $75.87.
S&P 500 futures are trading at 4161 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 45 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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