PRODUCER PRICES DECLINE – FED NOT YET BUCKLING

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By Nigam Arora & Dr. Natasha Arora

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

Producer Price Index

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:

  • One day after better than expected Consumer Price Index (CPI), Producer Price Index (PPI) is also softer than expected.
    • Investors should ignore year over year numbers and instead focus on month over month numbers.
      • To be successful, investors should not get caught up in their viewpoint.  More importantly, they should not justify their viewpoint by picking and choosing the data.  Right now, stock market bears are picking year over year inflation data to justify their viewpoint.
      • The purpose of trading and investing is not to justify a certain viewpoint but to maximize wealth generation while controlling risks.  Investors should consider being neutral and letting the data speak for itself without being prejudiced by a viewpoint.
      • Please click here for the podcast on maximizing wealth generation.
    • July PPI fell 0.5% vs. 0.3% consensus.
    • July Core PPI rose 0.2% vs 0.4% consensus.
  • Initial jobless claims came at 262K vs. 263K consensus.
  • The chart shows another move up in the stock market after yesterday’s rally on softer PPI.
  • The chart shows that the market is now approaching the low band of the resistance zone.
  • The chart shows that RSI is overbought and beginning to roll over.  This indicates that the rally is overdone.
  • It is too early to tell how Fed officials will react to PPI, but they are not yet buckling after soft CPI.  Here are the comments from two Fed officials after the CPI but prior to PPI.
    • Minneapolis Fed President Kashkari said that we are far from controlling inflation. He wants the Fed to raise its benchmark rate to 3.9% by the end of 2022 and to 4.4% by the end of 2023.  
    • Chicago Fed President Evans said that inflation is unacceptably high.  Evans sees 3.4% rate by the end of 2022.  
  • There is an old saying, “Do not fight the Fed.”  Right now the stock market is fighting the Fed.  The rally is based on the presumption that the Fed will not only stop raising rates but also start cutting rates.
  • Where the stock market goes from here will depend on if the Fed buckles or not.  If the Fed buckles, expect the stock market to go higher. If the Fed does not buckle, expect the market to significantly pull back.
  • An important data point that the stock market is ignoring is that quantitative tightening is scheduled to pick up steam in September as the Fed plans to double the amount of Treasury and mortgage bonds roll-off to $95B.  Will the Fed back off from quantitative tightening? 
  • The easy work is done on inflation as prices of oil and commodities have declined and so have the prices of airline tickets and used cars. However, the hard work is still ahead.  For example, rents are soaring.  Median rent has crossed $2,000 per month for the first time ever.  The rate of rent increases is the fastest in 30 years.  For the time being, the stock market is ignoring the hard work on inflation that is still ahead.
  • Due to the enthusiasm of the investors, the reality is that financial conditions have eased even though the Fed is trying to tighten financial conditions and tighter financial conditions are needed.
  • The dollar is dramatically weaker.  From yesterday’s Afternoon Capsule:

A dramatic drop in the US dollar is a double-edged sword.

  • On the positive side, it is good for the earnings of US multinationals.

  • On the negative side, the drop in the dollar is inflationary. This is happening precisely at a time when investors are celebrating lower inflation.  Investors need to look ahead and keep a close eye on the dollar.

Momo Crowd And Smart Money In Stocks

The momo crowd is aggressively buying stocks in the early trade.  Smart money is lightly selling stocks in the early trade.

See also  DEPLOY CASH AND REDUCE HEDGES – BETTER INFLATION DATA

Gold

The momo crowd is like a yoyo in gold in the early trade.  Smart money is inactive in the early trade.

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

Oil

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

For longer-term, please see oil ratings.

Bitcoin

There is significant bullishness in bitcoin as it approaches $25,000.

Markets

Our very, very short-term early stock market indicator is positive but can quickly turn negative.  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 $1812, silver futures are at $20.54, and oil futures are $93.39.

S&P 500 futures resistance levels are 4318, 4400 and 4460: support levels are 4200, 4000 and 3950.

DJIA futures are up 263 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 existing positions. Based on individual risk preference, consider holding 26% – 40% in cash or treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 12% – 15%, and short term hedges of 8% – 14%. This is a good way to protect yourself and participate in the upside at the same time.

See also  NASDAQ UP OVER 3% AS MISLEADING MOMO GURU NARRATIVE TAKES HOLD

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.

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This post was just published on ZYX Buy Change Alert.

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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.

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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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