WEEKLY STOCK MARKET DIGEST: BEARS CELEBRATE BUT BULLS DISMISS SHOCKINGLY EXCELLENT JOBS REPORT, CHINESE SPY BALLOON

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By Nigam Arora & Dr. Natasha Arora

Weekly Digest from The Arora Report is popular among serious investors and money managers because they have found studying insights from the prior week gives them an edge over the coming weeks. Here is the day by day rundown from the morning capsules made available every morning before the market open in the Real Time Feeds to the paying subscribers of The Arora Report

Please scroll down for the section ‘Protection Bands and What To Do Now.’

 

BEARS CELEBRATE BUT BULLS DISMISS SHOCKINGLY EXCELLENT JOBS REPORT, CHINESE SPY BALLOON

To gain an edge, this is what you need to know today.

Shockingly Excellent Jobs Report

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 yesterday there was a decisive breakout above the top band of the support/resistance zone.  The breakout gave a technical buy signal leading to aggressive buying by those following the traditional buy signal.
  • Yesterday, as momo gurus’ narrative started seeming credible, on top of a technical buy signal, FOMO (fear of missing out) started among money managers.
  • It is important for investors to understand that no money manager ever got fired for NOT protecting clients’ assets from losses, but money managers get fired for underperforming their benchmarks.  For this reason, on a day like yesterday, even prudent money managers felt that they had no choice but to hold their noses and buy stocks. 
  • Yesterday, even bearish investors were expecting a rip-roaring rally to continue.
  • The chart shows that as of this writing, the market has pulled back to the top band of the support/resistance zone.  The pull back has occurred for two reasons.
    • Earnings after the close yesterday
    • Excellent jobs report
  • Important earnings including projections after the close from Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), Qualcomm (QCOM), and Starbucks (SBUX) were less than expected. Overall, the tone on the conference calls was not encouraging for those like us who are very experienced at deciphering conference calls.
  • The market dismissed poor earnings and continued to levitate in after hours because of the narrative that had taken hold – the market was going to go up irrespective of earnings, just based on momentum.
  • This morning, bulls had to face a shockingly excellent jobs report. Bears are celebrating, but bulls are dismissing it as a statistical quirk.  Here are the details:
    • Non-farm private payrolls came at 443K vs. 175K consensus.
    • Non-farm payrolls came at 517K vs. 190K consensus.
    • Unemployment rate came at 3.4% vs. 3.6% consensus.
    • Hourly earnings came at 0.3% vs. 0.3% consensus.
  • Bulls are pretty determined that the stock market is going to go up irrespective of earnings.  Now, let us see if they continue to aggressively buy in the face of this shockingly excellent jobs report.
  • The implication of this excellent report is that the market totally misread Powell.
  • Powell will have another opportunity to clarify next week during an event at the Economic Club of Washington.
  • Investors should pay attention to what hunt and destroy algorithms did yesterday and how smart money sold right near the top.  Please click here to see the chart showing smart money selling. Please read yesterday’s Afternoon Capsule for details.
  • The foregoing demonstrates the value of following Arora’s Second Law of Investing and Trading: Nobody knows with certainty what is going to happen next in the markets.

Chinese Spy Balloon

Right now the stock market is oblivious, but prudent investors need to pay attention to the Chinese spy balloon that is floating over ballistic nuclear missile silos in Montana.  Strategic bomber bases are nearby in the Dakotas.  ‘Strategic’ is a code word for nuclear.

China is asking the U.S. to delay any action as China investigates.

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 falling on the excellent jobs report.

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 🔒.  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 up, and bonds are ticking down.

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 $1896, silver futures are at $22.82, and oil futures are at $76.15.

S&P 500 futures are trading at 4137  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 207 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.

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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.

 

STOCK MARKET BULLS EUPHORIC – BEARS CRUSHED BUT STAY FIRM TO THEIR CONVICTION

To gain an edge, this is what you need to know today.

Bulls Euphoric

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).

Europe

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.

England

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 🔒 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

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

Bitcoin is being bought along with speculative stocks.

Markets

Our very, very short-term early stock market indicator is 🔒.  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.

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DJIA futures are up 45 points.

 

BULLS POSITIONED FOR A RIP-ROARING RALLY, BEARS SET UP FOR A VICIOUS STOCK MARKET DROP

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 🔒 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 🔒. 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.

 

HOW FED SOLVES THE MOMO CROWD DILEMMA WILL DETERMINE THE STOCK MARKET DIRECTION IN THE SHORT TERM

To gain an edge, this is what you need to know today.

Fed’s Dilemma

Please click here for a chart of  Nasdaq 100 ETF (QQQ).

Note the following:

  • The chart shows that QQQ is up against the lower band of the resistance zone.
  • The chart shows that this rally has not been on high volume. This is a negative.
  • The chart shows RSI divergence.  In plain English, this means that as price has risen, RSI has declined. This is a negative.
  • FOMC is meeting starting tomorrow.
  • FOMC will announce its decision at 2pm ET on Wednesday, followed by Powell’s press conference at 2:30pm ET.
  • 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.
  • Based on all of the information we gather, it appears that what the Fed wants to do is aligned with The Arora Report analysis above.  However, the Fed faces a dilemma.  For the Fed to follow this course, financial conditions need to stay tight.
  • Financial conditions consist of several components with the stock market being one of the components.  However these days, a higher stock market is triggering other components to go higher, resulting in looser financial conditions.
  • Financial conditions have already loosened considerably because the momo crowd ran up the stock market going into the Fed meeting.  If the Fed embarks on the course mentioned above, momo gurus will issue aggressive buy signals, and the stock market will rocket to the upside. Such a move in the stock market will loosen financial conditions with a high probability of getting in the way of reducing inflation.  
  • The stock market has run up based on the presumption that the Fed will start cutting rates as early as April of this year and there will be at least two rate cuts this year.  Such rate cuts fly in the face of the Fed’s desire to not commit Burns’s blunder.  Burns’s blunder refers to the 1970s when the Fed Chair Arthur Burns lowered interest rates in response to declining inflation only for inflation to come roaring back.
  • Where the stock market goes in the short term will depend on how the Fed solves this dilemma.
  • The momo crowd has run up the stock market going into every Fed meeting on hope strategy.  Every time, the Fed has slapped the momo crowd with a big rate hike.  Every time, the stock market fell after the Fed meeting.  This time it is different in the sense that the hard data does not justify the Fed slapping the momo crowd.  
See also  JOBS ROCKET PAST ESTIMATES, BE CAREFUL LISTENING TO STOCK MARKET PERMABULLS

Europe

The momo crowd has recently been successful in running up European stocks on the narrative that there will not be a recession in Europe.  This morning the new GDP data from Germany is igniting recession fears again. Q4 GDP in Germany came at -0.2% quarter-over-quarter vs. 0.0% consensus. 

New data shows that inflation in Spain is hotter than expected.

War With China

Air Force General Mike Minihan said in a memo to the officers he commands that he is predicting a war with China in two years.  He is asking his officers to get ready for the war.

What War?

At a time when prudent investors are very concerned about a war with China over Taiwan, the momo crowd is rushing headlong to buy stocks in Taiwan.  Stocks in Taiwan rose 3.8% overnight.  This is the best performance since May 2021.  Stocks in Taiwan are now entering a new bull market.

Iran

There have been explosions at a military factory in Iran due to a drone attack.  There is speculation that Israel is behind the attack.  So far, the markets are oblivious.  However, prudent investors should keep an eye if there is an escalation.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 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

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 bulls are disappointed that whales did not run up bitcoin on Friday night, taking advantage of the low liquidity. Last week, bitcoin was running up as retail investors anticipated whales buying on Friday night.  Whales did not buy on Friday night, and bitcoin is down 2.62% and trading at $23,123 as of this writing.

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 up, and bonds are ticking down.

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 $1946, silver futures are at $23.85, and oil futures are at $78.01.

S&P 500 futures resistance levels are 4200, 4318, and 4400: support levels are 4000, 3950, and 3860.

DJIA futures are down 138 points.

 

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Nigam Arora

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

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.

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