WEEKLY STOCK MARKET DIGEST: PROTECT YOURSELF BUT OPPORTUNITIES AHEAD – CURRENCY WARS ON TOP OF 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.’

OPPORTUNITIES AHEAD – GLOBAL BREAKDOWN STARTING – EVENTS FROM JAPAN AND UK DRIVING US STOCKS LOWER

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

Breakdown Starting On A Global Basis

Please click here for a chart of 7 – 10 year Treasury ETF IEF.

Note the following:

  • Breakdowns are starting on a global basis.  Events in Japan and the UK are driving US stocks lower.  Be very careful with mainstream media.  There is a lot of noise and no focus on the important breakdowns on a global basis.  We got you ahead of the curve yesterday, as we have done for a very long time.  The Morning Capsule headline read in part “JAPAN  INTERVENES IN FX MARKETS.”
  • In yesterday’s Morning Capsule, we wrote,

Japan has intervened for the first time since 1998 to stop the yen from falling.  Japan is the only major central bank still pursuing easy money policy.

  • In the intervention to stop the yen from falling further, the Bank of Japan sold dollars and bought yen.  Where do you think the dollars come from?  To boost its dollar reserves, in The Arora Report analysis, the Bank of Japan was likely selling 10-year Treasuries.
  • The chart shows that 10-year Treasuries were hanging in for a while at the support.
  • The chart shows that 10-year Treasuries broke down, presumably by selling from the Bank of Japan.  If our analysis is correct, selling by the Bank of Japan could not have come at a worse time as international investors were already jittery after Powell’s press conference on Wednesday.
  • Yield on 10-year Treasuries is the benchmark that, in part, determines price earnings ratios.  Bonds move inverse to the yield.  When yields go up, bonds go down, as shown on the chart.
    • The rising yield on 10-year Treasuries means that price earnings ratios on stocks will contract.
    • The valuation of stocks is calculated using a discount rate based on 10-year Treasuries to determine the present value of the future earnings stream.
    • These are extremely important concepts that every serious investor should master.  In the environment we see for the next few years, investors who do not master these concepts will be at a big disadvantage.
    • Those who have not yet mastered the concepts, but want to master them, listen to the podcast titled “Be Careful with Popular Long Duration Stocks.”
  • Putting further pressure on the stock market today is that the pound is hitting a 37-year low.
    • The reason is that the interest rates in the UK are jumping sharply.
    • Interest rates in the UK are jumping sharply because of the British government’s plan for the biggest tax cuts since the 70’s. This comes on top of billions the British government plans to spend to subsidize energy costs for consumers and businesses over the next two years.
    • You may be thinking how is the British government going to pay for these tax cuts and subsidies.  You probably guessed the answer correctly – the UK is going to heavily borrow more.
  • The fear is that just like the UK, other countries will also go on a borrowing binge.  This is on top of the borrowing binge during the pandemic.
  • The fear from the moves in the yen and the pound is that serious dislocation in the forex market may be ahead.  If such dislocations occur, they will have a significant impact on the earnings of S&P 500 companies. 
  • The chart shows that RSI is very oversold. This means that the 10-year Treasuries can quickly rally.  If 10-year Treasuries rally, the stock market has the potential to have a face ripping rally.  In our analysis at The Arora Report, such a rally will likely be a bull trap.
  • As an actionable item, pay close attention to the ‘Protection Band And What To Do Now?’ section below.

Opportunities

Bear markets end.  The best buying opportunities occur in bear markets.  Stay tuned. 

Technicals

DJIA is poised to take out June lows.  DJIA has been the strongest of the three major indexes, the other two being S&P 500 and NASDAQ.  From a technical perspective, this is a negative development.

Goldman Sachs Cut

Why is The Arora Report a must read for many money managers on Wall Street who work for big prestigious banks with large in-house research departments?  You already know the answer – The Arora Report helps investors and money managers get ahead of the curve.

Most Wall Street strategists still have full allocation to stocks and very little cash and hedges. The news this morning is that the dominos are beginning to fall.  Goldman Sachs (GS) has just cut its year-end target to 3600.  Goldman Sachs’s target as of yesterday was 4300.

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

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

There is selling in bitcoin along with speculative momo stocks.

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 but this can quickly reverse as described above.

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 $1664, silver futures are at $19.20, and oil futures are at $79.84.

S&P 500 futures resistance levels are 3770, 3860 and 3950: support levels are 3630, 3600 and 3520.

DJIA futures are down 286 points.

Protection Bands And What To Do Now?

It is important for investors to look ahead and not in the rearview mirror.

See also  DEPLOY CASH AND REDUCE HEDGES – BETTER INFLATION DATA

Consider continuing to hold 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.

 

INVESTORS PAY ATTENTION TO FED’S PROJECTIONS, JAPAN INTERVENES IN FX MARKETS

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

Fed Projections

Please click here for a table of Fed projections.

Note the following:

  • The table shows the Fed’s projections for change in real GDP, unemployment rate, PCE inflation, Core PCE inflation, and Federal funds rate.
    • The table also shows prior projections made in June.
  • The table shows that the Fed is targeting the unemployment rate. The Fed is projecting the unemployment rate to rise to 4.4% in 2023, remain there in 2024, and drop only to 4.3% in 2025.
  • From the Fed’s projections, it is clear that the Fed is targeting labor wages.
  • The Fed is projecting anemic growth.  The median projection is only 0.2% in 2022 and 1.2% in 2023.  For 2023, the Fed is projecting the range for growth to be -0.3% at the low end.  The table shows the median, central tendency, and range numbers.
  • The median Fed projection for PCE inflation is 5.4% in 2022, 2.8% in 2023, and 2.3% in 2024.
  • The Fed’s median projection for the Fed funds rate is 4.4% for 2022, 4.6% for 2023, 3.9% for 2024, and 2.9% for 2025.  This throws cold water over momo gurus’ projections that the Fed will start cutting rates soon. 
  • After yesterday’s whipsaw and suffering losses, as shown on this chart, the momo crowd is buying stocks again this morning.  For the sake of complete transparency, this is the same chart that was published in yesterday’s Afternoon Capsule.

Jobless Claims

Initial claims came at 213K vs. 220K consensus.  This indicates that the argument of the Fed not increasing rates further is incorrect because the labor market is still strong. 

Japan Intervenes

Japan has intervened for the first time since 1998 to stop the yen from falling.  Japan is the only major central bank still pursuing easy money policy.

England

Bank of England increased interest rates by 50 bps.

Switzerland

Swiss National Bank increased interest rates by 75 bps.

Momo Crowd And Smart Money In Stocks

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

Gold

There is buying in gold on Russia’s nuclear threat. 

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

There are reports that Hong Kong will begin testing a central bank digital currency in the fourth quarter.

Colorado is the first state to accept state tax payments in bitcoin.

There is buying in bitcoin, but it is still under $20,000.

Markets

Our very, very short-term early stock market indicator is 🔒 but expect the momo crowd to run up the market.  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 $1691, silver futures are at $19.84, and oil futures are at $84.60.

S&P 500 futures resistance levels are 3860, 3950 and 4000: support levels are 3770, 3630 and 3600.

DJIA futures are up 1 point.

 

BULLS HOPING FOR FIFTH FED DAY RELIEF RALLY, MARKET IGNORES NUCLEAR THREAT

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

Relief Rally

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 FOMC meeting concludes today.  The policy statement will be released at 2pm ET.  Powell’s press conference will follow at 2:30pm ET.
  • The chart shows that the market is at the top of the support zone.
  • The chart shows that RSI is sloping down, and the market is close to oversold.
  • So far, the Fed has raised rates four times in 2022.  Every time, the momo crowd has run the market up.  Here are the details:
    • After the 25 bps hike on March 16, S&P 500 rose 2.24%.
    • After the 50 bps hike on May 4, S&P 500 rose 2.99%.
    • After the 75 bps hike on June 15, S&P 500 rose 1.46%.
    • After the 75 bps hike on July 27, S&P 500 rose 2.62%.
  • Due to its importance, it is worth repeating what we wrote in yesterday’s Morning Capsule,

The positioning is negative going into the Fed meeting.  For this reason, it will take only a tiny move up for the algorithms to start buying.

  • For those who want next level knowledge on positioning, consider listening to the podcast titled “Market Mechanics: Positioning To Gain An Edge.”
  • The chart shows the market is below the algo selling line, shown in red.
  • Markets are complex and multidimensional.  Prudent investors need to be mindful of two very important points.  
    • In The Arora Report analysis, Wall Street’s earnings estimates are too high.  As earnings estimates come down, it will put downward pressure on the stock market.  
    • In The Arora Report analysis, PE multiple for stocks is still too high for the current conditions.  Unless the Fed backs off from fighting inflation or there is a dramatic reduction in inflation, PE multiple is likely to contract.  
    • These two important points show that there is significant downside risk to this market.  
  • While the momo crowd is focused on running the market up, smart money appears to be focused on the projections from the Fed of the future.
    • The dot plot shows projections for the Fed funds rate.
    • Smart money will be looking at dot plot and other indications of the terminal Fed rate.
    • The last projections on the dot plot from Fed officials are from June. At that time, most officials were below 4%.
    • Right now, the bond market is pricing the terminal rate of 4.5%.
  • Start with Arora’s Third Law of Investing and Trading.  The Third Law states, “Making investing and trading decisions based on probabilities is the only realistic and profitable approach.”
    • Prudent investors need to be aware that in The Arora Report analysis, there is about 30% probability that the terminal rate could go to 5%.  If the Fed funds rate goes to 5%, the stock market will likely fall below the “not mother of support zones” shown on the chart.
See also  NASDAQ UP OVER 3% AS MISLEADING MOMO GURU NARRATIVE TAKES HOLD

Nuclear Threat

Putin has raised the specter of a nuclear response in Ukraine.  The market has ignored the threat, but prudent investors should take the threat seriously.

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

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

Oil

API reported 1.035M barrels build vs. 2.321M barrels consensus.

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 remains under the $20,000 psychological threshold.

Markets

Our very, very short-term early stock market indicator is 🔒 but may turn 🔒 on the Fed announcement and Powell’s remarks.  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 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 $1683, silver futures are at $19.64, and oil futures are at $85.36.

S&P 500 futures resistance levels are 3950, 4000 and 4200: support levels are 3860, 3770 and 3630.

DJIA futures are up 142 points.

 

FED AHEAD – DO NOT IGNORE THE HIGHLY FLAWED MOMO NARRATIVE FOR A RIP-ROARING RALLY

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

Highly Flawed Narrative

Please click here for a chart of long bond ETF TLT.

Note the following:

  • Bonds move inverse to the yield.  As yields on short duration debt have risen, the yields on long bonds have not kept up.  The reason is that inflation expectations over 20 – 30 years are low.  In The Arora Report analysis, these low inflation expectations over the very long term will likely turn out to be wrong.  
  • The chart shows that TLT has fallen below the support.  This is a negative for the stock market.
  • The chart shows a downward sloping trendline.  This is a negative for the stock market.
  • The chart shows that RSI is oversold.  This, in part, is helping the highly flawed narrative of the momo gurus that the yield will not go any higher and this in turn will help a rip-roaring rally in the stock market.
    • Prudent investors need to pay attention, as in the very short term the technical setup favors the momo crowd.
  • Prudent investors need to pay attention to the highly flawed momo narrative that has taken shape that ran up the stock market going into the close yesterday.  Here is the narrative.
    • If the Fed raises rates by 75 bps, the stock market will go up because the Fed did not raise rates by 100 bps.
      • Here is The Arora Report call.  There is a 70% probability of a 75 bps interest rate hike and a 30% probability of a 100 bps interest rate hike.
    • If the Fed raises rates by 100 bps, it would mean that the Fed has regained its credibility to fight inflation, and for this reason, the stock market will go up.
    • There will be plenty of opportunities to twist Powell’s words to persuade the momo crowd to buy.
    •  If all else fails, the “do not believe the Fed” narrative has proven to be sticky with the momo crowd.
  • In The Arora Report analysis, the foregoing narrative is highly flawed, but investors need to pay attention to it because of positioning.  The positioning is negative going into the Fed meeting.  For this reason, it will take only a tiny move up for the algorithms to start buying.
    • If a tiny move up occurs, investors who follow technical analysis will get a buy signal and start buying.
    • You saw the proof of the power of this narrative in a strong rally going into the close yesterday.  The positioning coming into yesterday was negative.
    • Understanding the positioning can give you a big edge in the market and can significantly increase your returns over a long period of time.  Understanding positioning also helps you reduce your risk.  To gain in-depth knowledge on positioning, listen to the podcast titled “Market Mechanics: Positioning To Gain An Edge.” 
  • The sum total of the foregoing is that investors need to stay cautious but, at the same time, should not ignore the potential of a rip-roaring rally due to the flawed narrative that is being set up.

Housing Starts

Housing starts came at 1.575M vs. 1.448M consensus.  More housing starts than expected is a surprise in this environment.  This is helpful for a bullish case on the stock market.  

Building permits came at 1.517M vs. 1.610M consensus.

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 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.

See also  WEEKLY STOCK MARKET DIGEST: YIELD CURVE TURNS MORE NEGATIVE BUT “DO NOT BELIEVE FED” NARRATIVE TAKES HOLD

Bitcoin

Bitcoin is above $19,000.

Markets

Our very, very short-term early stock market indicator is 🔒 but be careful because the momo crowd will likely buy ahead of the Fed on hope strategy.  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 $1675, silver futures are at $19.24, and oil futures are at $85.56.

S&P 500 futures resistance levels are 3950, 4000 and 4200: support levels are 3860, 3770 and 3630.

DJIA futures are down 225 points.

 

FED MEETING AHEAD – A MUST SEE 68 YEAR CHART

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

Fed Meeting Ahead

Please click here for a chart of the Federal funds effective rate.

Note the following:

  • We have previously shared with you that 3884 was a critical level in S&P 500 futures.  S&P 500 futures are trading around 3860 as of this writing.
  • The FOMC meeting starts Tuesday.  The policy statement will be released on Wednesday at 2pm ET.  Powell’s press conference will start at 2:30pm ET.
  • Here is The Arora Report call:
    • There is a 70% probability of a 75 bps interest rate hike.
    • There is a 30% probability of a 100 bps interest rate hike.
  • Lately, the momo crowd buys ahead of the Fed meeting.  Their reason for buying ahead of the Fed meeting is hope strategy.  On top of that, the new momo crowd gurus’ narrative is to not believe the Fed.
    • Momo crowd gurus will be looking for anything they can twist to show as proof that the Fed is not serious about fighting inflation to persuade their followers to buy stocks.
  • This morning stock futures are down in spite of momo buying because yields keep on rising.
  • The chart shows that with the exception of the last decade, the Fed funds rates have been generally higher.  The chart spans 68 years.
  • When you look at the chart, it is conceivable that the Fed funds rate could go to 5% or higher.
  • If the Fed funds rate goes to 5% or higher, expect a down move in the stock market.
    • Stock market bulls are now accepting that the Fed funds rate may go to around 4%, but they are contending that it will not stay there long because of recessionary fears.
    • Stock market bears contend that the Fed will keep interest rates high for a long time.
    • Powell has said that he intends to keep interest rates high until the Fed sees inflation coming down for several months.
  • On the positive side, various components of inflation that we watch at The Arora Report are peaking.  If the narrative of inflation peaking takes hold, smart money and other groups in the stock market that are selling now will stop selling and momo crowd buying can take the stock market significantly higher.  
  • World Bank President David Malpass said that the world is heading for a recession in 2023.
    • Investors need to remember that the best stock buying opportunities occur during a recession.  It is important to stay involved, have enough cash and hedges and buy when the signals are given.  
    • One of the biggest mistakes investors make is that they get disillusioned and disengaged as the economy heads towards a recession, and then they miss the best buying opportunities.
  • Investors need to stay nimble and watch the data.
  • The sum total of the foregoing as an actionable item is in the Protection Bands And What To Do Now section below.

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

There is selling in bitcoin.  Bitcoin is under $19,000.

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 $1674, silver futures are at $19.34, and oil futures are at $82.44.

S&P 500 futures resistance levels are 3950, 4000 and 4200: support levels are 3770, 3630 and 3600.

DJIA futures are down 259 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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