INDICATION OF THE TERMINAL RATE WILL DRIVE THE STOCK MARKET

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By Nigam Arora & Dr. Natasha Arora

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

Terminal Rate

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

Note the following:

  • Investors need to filter out the noise and focus on what is important.  We have repeatedly shared with you that there are three important keys to this market:
    • The terminal rate
    • How long the Fed keeps interest rates at the terminal rate
    • Earnings and earnings projections
  • The foregoing is for the longer term.  In the short term, the momo crowd is often in control.  For this reason, all investors need to pay attention to the momo crowd.
  • The chart shows that TLT has decisively broken the down trendline.
  • The chart shows that TLT is hovering at the support/resistance line.
  • The chart shows that TLT made a higher low.
  • The chart shows that RSI can go either way from here.
  • The sum total of the chart is that yields on long term bonds have fallen.  The net effect is that the PE of the stock market can go higher.
  • Investors need to think of not only PE but also earnings and earnings projections.  Here the PE can go higher, but Wall Street’s earnings estimates are still too high.
  • Investors also need to know that on a historical basis the current PE is no bargain.
  • Yesterday, the stock market was a mirror image of October 13.  On October 13, CPI came worse than expected – the market opened significantly lower and rallied all day.  Yesterday, CPI came better than expected – the market opened significantly higher and then fell all day.  Please see yesterday’s Afternoon Capsule for details.
  • The consensus is that the Fed will raise interest rates by 0.5%.  The immediate driver of the stock market will be the following:
    • Does dovish or hawkish Powell show up?
    • The dot plot
  • The dot plot shows the forecast of the FOMC members.  In September, the dot plot showed a median Fed funds rate of a little below 5% next year.
  • The futures market is forecasting a high rate next year of 4.82%.
  • Powell could conceivably declare victory over inflation given the latest data.  In such an event, the stock market can easily move up 5% – 10% in one day.
  • Alternatively, Powell could emphasize that for the Fed to not repeat Burns’s blunder, the Fed has to target the labor market, especially in services.  The labor market has continued to stay strong.  This necessitates further work from the Fed.  If Powell takes this posture, the stock market could go down 2% – 5%.
  • Here are the probabilities:
    • Market going higher 45% from prior 40%
    • Market staying range bound 25% from prior 30%
    • Market falling 30% from prior 30%
  • Positive seasonality kicks in in the second half of December. From a traditional, technical analysis perspective, yesterday’s drop in the stock market from the open was on high volume, giving a classic sell signal. However, as we have repeatedly written before, investors should not rely only on traditional technical analysis.  It does not work as well now as it used to back in the 1980’s.  This is the reason that The Arora Report has developed new proprietary technical analysis techniques that work in the current market.
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Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) 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 🔒 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 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 $1819, silver futures are at $23.94, and oil futures are at $76.15.

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

DJIA futures are up 31 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.

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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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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.

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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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