WEEKLY STOCK MARKET DIGEST: FIRST SIGNS OF SMART MONEY SELLING JUNK STOCKS – HOTTER PRODUCER INFLATION

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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.’

 

NASDAQ COULD FALL 14% BY THIS MEASURE

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

Nasdaq Could Fall

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

Note the following:

  • The chart compares QQQ with 7-10 year Treasury Bond ETF IEF, and long duration ARK Innovation ETF ARKK.
  • The chart shows that since the December low, IEF rose in January and now has pulled back close to its December low.  IEF moves inverse to the 10-year Treasury yield.  The 10-year Treasury yield has risen to 3.8840% as of this writing from the low of 3.3750% in January 2023.
  • The 10-year Treasury yield is the benchmark as it is a major factor in determining price earning ratios.
  • So far, earnings have been worse than expected, but stock bulls have taken comfort in that they have not been dire.  Moreover, the momo crowd has focused only on the good parts of earnings and projections and ignored the bad parts.
  • The chart shows that QQQ was about 14% lower in December when IEF was about the same level it is now.
  • The situation is more dramatic for junk stocks.  We previously wrote:

Many junk stocks are up 70% – 250% in 2023.

  • The chart shows that ARKK is up about 30% from the December low.  IEF has now pulled back close to the December low, but ARKK continues to levitate on momo crowd exuberance.
  • Fed fund futures are now expecting a high rate of 5.32% in August 2023.
  • With the latest rise in yields, the bond market is now aligned with the Fed.
  • Due to the momo crowd’s exuberance, the stock market continues to be out of sync with the Fed and the bond market.

Fifth Blow To The Head Was Too Much

There were four pieces of data that were blows to momo gurus’ thesis.  Here were the four blows:

  • Strong jobs report
  • Hotter CPI
  • Hotter PPI
  • Fed’s Mester saying that she wanted a 50 basis point hike in the last meeting when the Fed raised interest rates only by 25 basis points.

We have written about these four points.  In yesterday’s Morning Capsule, we shared with you:

The Fed’s Mester is saying that the inflation risk is to the upside.  Mester said that she supported a 50 basis point rate hike during the last meeting.  The Fed increased interest rates by 25 basis points.

The momo crowd ignored all of the four blows to its thesis, then came the fifth blow to the head from St. Louis Fed President Bullard in the mid-afternoon yesterday.  Bullard said that he could not rule out a 50 basis point hike at the March meeting.

The fifth blow was simply too much and caused the momo crowd to start selling going into the close yesterday.

Momo crowd selling continues this morning in the early trade.

Lately, the favorite technique of the momo crowd has been to buy the opening low, run up the stock market during the day, and boast that every day buying the opening low is easy money. Prudent investors should observe if the same pattern repeats itself today or if it has finally broken after the fifth blow.

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 coming under pressure because the dollar is rising.  Gold is priced in dollars.  Therefore, when the dollar rises, the price of gold goes down.

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 gurus are trying their best to get mom and pop excited by saying $30,000 is around the corner.  Bitcoin continues to levitate.  Bitcoin is trading at $23,817 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 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 $1837, silver futures are at $21.31, and oil futures are at $76.23.

S&P 500 futures are trading at 4078  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 119 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.

See also  PRUDENT INVESTORS PAY ATTENTION TO CANARY IN COAL MINE – OBLIVIOUS MOMO CROWD SUPPORTING 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.

 

FIRST SIGNS OF SMART MONEY SELLING JUNK STOCKS – HOTTER PRODUCER INFLATION

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

First Signs

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 with S&P 500 high beta ETF SPHB, S&P 500 low volatility ETF SPLV, and long duration innovation ARK ETF ARKK.
  • The chart shows the following:
    • SPHB has outperformed SPY by 13.8%.
    • SPLV has underperformed SPY by 9.53%.
    • ARKK has outperformed SPY by 33.52%.
    • Many junk stocks are up 70% – 250% in 2023.
  • There are first signs that smart money is beginning to sell the strength in junk stocks generated by momo crowd buying. It is yet to be seen if smart money gets aggressive in selling junk stocks.
  • It is important to take an extra minute and ponder the chart to understand that there is thin ice below this 2023 stock market rally. 
  • New data shows that inflation at the producer level is running hot. Here are the details:
    • Producer Price Index (PPI) came at 0.7% vs. 0.4% consensus.
    • Core PPI came at 0.5% vs. 0.3% consensus.
  • Yields have ticked up on hotter PPI. Ten-year Treasury yield has moved to 3.813%. Two-year Treasury yield has moved to 4.638%.
  • Institutional selling quickly appeared in stocks after the release of PPI data.
  • The Fed’s Mester is saying that the inflation risk is to the upside.  Mester said that she supported a 50 basis point rate hike during the last meeting.  The Fed increased interest rates by 25 basis points.
  • Bullard will be speaking later and may move the market.

Jobless Claims

Jobless claims is a leading indicator and carries heavy weight in the adaptive ZYX Asset Allocation Model.  Adaptive means that it changes itself with market conditions.  Please click here to see the ten categories of inputs.

Jobless claims came at 194K vs. 203K consensus. This indicates that overall, the job picture is very strong.  Even though many layoffs are occurring in tech and finance, at the lower end, demand for workers is very strong.

Housing

Housing starts came at 1.309M vs. 1.355M consensus.

Building permits came at 1.339M vs. 1.350M consensus.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 stocks in the early trade.  Smart money is 🔒 stocks in the early trade.

Gold

The momo crowd is 🔒 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 🔒 in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Along with buying in junk stocks, there has been aggressive buying in bitcoin.  BItcoin is trading at $24,451 as of this writing in the premarket. The resistance zone is $25,200 – $25,700.

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 $1841, silver futures are at $21.46, and oil futures are at $78.96.

S&P 500 futures are trading at 4112  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 279 points.

 

CONSUMER BUYING BINGE MEANS HIGHER RATES FOR LONGER

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

Buying Binge

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 is consolidating right under the top band of the resistance zone even after hotter CPI and hotter retail sales.  This indicates that bulls are firmly in control of the stock market but are having trouble making headway because sellers appear on strength.
  • The macro is going so strongly against the bulls that there is a high probability of smart money starting to sell.  If smart money starts selling, the stock market will pull back.
  • The consumer buying binge continues.  Retail sales were very strong.  Here are the details:
    • Retail sales came at 3.0% vs. 1.7% consensus.
    • Retail sales ex-auto came at 2.3% vs. 0.8% consensus.
  • Strong retail sales data after hotter CPI means higher interest rates for longer unless there is a change in the data.
  • It was only a few days ago when momo gurus were running up the stock market based on their narrative that the Fed would have to cut interest rates because of the consumer.  Now that the data shows that the Fed is not going to cut interest rates and momo gurus’ narrative has been proven wrong, momo gurus have shifted their narrative.  The new narrative is to buy stocks to fight the Fed.  Remember that previously, for years, momo gurus’ narrative was do not fight the Fed and buy stocks.  Prudent investors cannot afford to act based on pronouncements from momo gurus disguised as analysts.
  • It is a serious mistake to ignore the momo crowd.  Right now, the momo crowd is in control of the stock market.
  • As an actionable item, consider following the protection band.  There is no change in the protection band as it is just right for a proper balance between the momo crowd’s exuberance and a negative macro picture for the stock market. 
See also  INVESTORS PAY ATTENTION TO NVIDIA, APPLE, AND MICROSOFT DIVERGENCE; ELECTION SHOCK IN FRANCE

China

There are allegations that a Chinese ship used a laser to temporarily blind the crew of a Filipino ship.  The U.S. is promising to defend the Philippines.

Theft

ASML, a Dutch company that has a near monopoly over the essential process to manufacture advanced semiconductor chips, is accusing a former employee of stealing critical chip technology to benefit China.  China has been desperately trying to get a hold of ASML technology.  The U.S. and the Netherlands have banned the shipment of advanced ASML products to China.

This is an important development and will likely increase tensions with China.

Buffett About Turn

Taiwan Semiconductor (TSM) manufactures most of the advanced chips.  For example, artificial intelligence bot ChatGPT was trained on 10,000 Nvidia (NVDA) GPUs.  These GPUs were likely manufactured by TSM.  The CPU in your iPhone is manufactured by TSM.

Not long ago, Warren Buffett had taken a very large position in TSM. Buffett is known for holding positions for a long time.  The news is that Buffett has cut his TSM stake from 60.06M to 8.29M shares in a short time.

There has been a concern about China invading Taiwan.  The stock market is ignoring this concern.  What does Buffett know that the rest of us do not know? 

As a full disclosure, ZYX Short has taken a short position in TSM for a short term trade.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 stocks in the early trade.  Smart money is 🔒 in the early trade.

Gold

China imported 1,343 tons of gold in 2022, a 64% increase over 2021.  As a reminder, Russia significantly increased its gold imports before the Ukraine invasion.  Could China be increasing its gold imports to build up defenses against U.S. sanctions if China attacks Taiwan?

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 seeing buying.

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 $1844, silver futures are at $21.52, and oil futures are at $78.30.

S&P 500 futures are trading at 4131  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 173 points.

 

INFLATION STAYS ELEVATED BUT MOMO CROWD BUYS STOCKS

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

Inflation Stays Elevated

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 is hovering around the top band of the support/resistance zone.  When this behavior is looked at in the context of the CPI numbers given below, the only objective conclusion is that the momo crowd is in control.
  • For the stock market to go down substantially, the bullish momo crowd will have to lose control of the market or start panicking and selling.
  • CPI data shows that inflation is staying elevated.  Here are the details:
    • Headline CPI came at 0.5% month-over-month vs. 0.5% consensus but less than the Cleveland Fed’s model of 0.61%.
    • Core CPI came at 0.4% month-over-month vs. 0.4% consensus but less than the Cleveland Fed’s model of 0.46%.
  • Yesterday, the stock market rallied in part because momo gurus were circulating whisper numbers less than the consensus.  On top of that, the momo crowd was buying on hope strategy.
  • The data released this morning has proven momo gurus’ whisper numbers wrong again. History shows that momo gurus are consistently wrong on economic data, but they still manage to persuade their followers to buy stocks and thus succeed in running up the stock market.
  • The stock market initially fell on the numbers, but the momo crowd aggressively bought the dip, turning the market strongly positive.
  • The spike up was aggressively sold by some institutions causing another dip.  As of this writing, the momo crowd is aggressively buying the second dip of the morning.
  • As we dig through the details of the numbers, in The Arora Report analysis, the preliminary conclusion is the same that we have previously shared with you. When we focus on core services ex-shelter, inflation is running at 4% – 5%. We have previously shared with you our analysis that it will be difficult to bring down core services ex-shelter down to the Fed’s target of 2%.  This means that the Fed has two choices:
    • Change the goal post and settle for 3% – 5% inflation.
    • Keep interest rates higher for longer.
  • Unlike the stock market, there is rationality in some corners of the markets.  Fed funds futures are now trading slightly above the Fed’s own targets.
  • As an actionable item, for the time being, stay with the protection band.  Scroll down to the section below.  The protection band is just right to balance the negative economic data with the momo crowd’s exuberance. 

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 🔒 in gold in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see gold and silver ratings.

Oil

The Biden administration has decided to release another 26M barrels of oil from the Strategic Petroleum Reserve (SPR).  This is putting downward pressure on oil prices.

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.

See also  DON’T IGNORE CHINA RISK IF YOU ARE CAUGHT UP IN AI FRENZY, EUPHORIA BUILDS ON COOLER CPI, $2400 GOLD

Interest rates and bonds are range bound.

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 $1871, silver futures are at $21.82, and oil futures are at $78.63.

S&P 500 futures are trading at 4143  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 50 points.

 

POTENTIAL MAKE OR BREAK CPI AHEAD – BONDS MOVE CLOSER TO THE FED BUT STOCKS FIGHT

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

CPI Ahead

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 came down to the low band of the support/resistance zone.
  • The chart shows that the stock market is trying to bounce from the low band of the support/resistance as expected.
  • The chart shows RSI can go either way.
  • Going into the all important CPI number, bonds have moved closer to the Fed position.
    • The Fed announced its decision on February 1.  On February 2, the yield on 2-year Treasuries hit 4.09%.  From that low, there is a significant move up to 4.551% as of this writing.
    • The yield on 10-year Treasuries has moved from the low of 3.33% on February 2 to 3.745% as of this writing.
  • In contrast to bonds, stocks continued to rally until Friday.
  • The reason behind the contrast in stocks and bonds is that the stock market is dominated by the momo crowd. Momo gurus’ narrative to fight the Fed has taken hold in the stock market.  The bond market is not dominated by the momo crowd.  The prevailing narrative in the bond market is to not fight the Fed.
  • CPI is potentially a make or break moment for the stock market rally.  Bulls are expecting cooler CPI, and bears are expecting hotter CPI.
  • We previously wrote:

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.

  • We also previously shared that the Cleveland Fed model is predicting a headline CPI of 0.63% month-over-month.  As of this morning, it has come down to 0.61%.
  • We previously shared with you that the Cleveland Fed model is predicting January Core CPI of 0.46% month-over-month.  As of this morning, it remains 0.46%.
  • As is their pattern, the momo crowd is buying stocks ahead of CPI.  The momo crowd uses hope strategy.  The momo crowd is hoping for a cooler CPI.  What happens if CPI is hotter than expected?  Well, risk is not part of the momo crowd’s equation.

 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 positive impact of the Russian production cut has faded. Oil is being sold on the prospect of a higher CPI tomorrow.

The momo crowd is 🔒 oil in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see oil ratings.

Bitcoin

The New York Department of Financial Services has ordered Paxos to cease issuing Binance USD.  Binance USD is the third largest stable coin.  It is held by 6.2M investors.

Bitcoin has pulled back along with speculative stocks.  It is trading below $22,000.

Markets

Our very, very short-term early stock market indicator is 🔒.  What the market does today will come down to how aggressive momo buying 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 range bound.

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 $1867, silver futures are at $21.96, and oil futures are at $79.05.

S&P 500 futures are trading at 4107  as of this writing.  S&P 500 futures resistance levels are 4200, 4318, and 4400: support levels are 4000, 3950, and 3860.

D futures are down 18 points.

 

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Picture of 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.

Picture of 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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