WEEKLY STOCK MARKET DIGEST: MOMO CROWD BUYS STOCKS ON ACCELERATING RECESSION FEARS

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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.’

MOMO CROWD BUYS STOCKS ON ACCELERATING RECESSION FEARS

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

Recession Fears

Please click here for a chart of copper ETF (CPER).

Note the following:

  • The momo crowd is aggressively buying stocks on accelerating recession fears.
  • The logic of the momo gurus to buy stocks is that with increasing recession fears, the Fed will back off from fighting inflation and become dovish.  If the Fed stops fighting inflation, interest rates will not go as high, and the stock market will go up.  Keep in mind that the job of the momo gurus is not to look out for your best interest but to persuade you to keep buying stocks.
  • Should you buy into momo gurus’ logic?
  • Momo gurus’ analysis is flawed as it is one dimensional, whereas the markets are complex and multidimensional.
    • The Fed has clearly stated that the main job is to fight inflation even if it causes a mild recession. As we shared with you previously, the momo crowd does not believe the Fed.
    • If the Fed stops fighting inflation, the result will likely be stagflation.  Stagflation is the biggest threat to your wealth. All investors should consider getting ahead of the curve and increasing their knowledge about stagflation so that you can protect yourself and also make money if stagflation occurs. To help, there is a podcast series on stagflation. The fourth podcast in the series “Stagflation: Buffett’s Portfolio” is now live.
  • A very important question right now is the probability of a recession.
  • In The Arora Report analysis, the probability of a recession is now 75%.
  • The chart shows a simple way for investors to think about a recession.
  • The chart is of copper, and copper is known as Dr. Copper because of its ability to forecast economic activity.
  • The chart shows that copper is breaking down. Copper is not only breaking down, it is gapping down. This indicates that the probability of a recession has risen rapidly in recent days.
  • Here are the key probabilities at this time:
    • A shallow recession is likely to lead S&P 500 to 3,400 – 3,500.
    • A moderate recession is likely to lead S&P 500 to 2,900 – 3,000.
    • A severe recession is likely to lead S&P 500 to 2,400 – 2,500.
  • If there is no recession and a soft landing occurs, S&P 500 is likely to go up to 4,500 – 5,000.
  • Investors should consider the foregoing scenarios within the framework of Arora’s Third Law: Making investing and trading decisions based on probabilities is the only realistic and profitable approach.
  • As an actionable item, the sum total of the foregoing is in the section below titled “Protection Bands And What To Do Now.”

An Important Technical Level

Followers of traditional technical analysis have been focused on 3,800 S&P 500 level.  It is not uncommon for a round number such as 3,800 to become psychologically important. The call from those following traditional technical analysis has been that the stock market will be off to the races if S&P 500 goes over 3,800.  This morning in the premarket S&P 500 has gone over 3,800 and is trading at 3,825 as of this writing.

New Data

The University of Michigan Consumer Sentiment – Final number will be released at 10am ET. The consensus is 50.0.

New home sales data will also be released at 10am ET.  The consensus is 570K.

Both of these pieces of data have the potential to move the market in either direction.  However, expect the momo crowd to continue buying, as they believe the bottom is in.

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 🔒 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 as risk sentiment improves.

Markets

Our very, very short-term early stock market indicator is 🔒 but can move significantly based on the data that will be released at 10am ET.  Also, keep in mind that today is a Friday.  Short squeezes tend to occur on Fridays.   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.

See also  STOCK BUYING ON NEW MOMO NARRATIVE – A NEW BULL MARKET HAS STARTED

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 $1823, silver futures are at $20.75, and oil futures are $106.47.

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

DJIA futures are up 202 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 🔒 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.

 

BIGGEST CURRENT ACCOUNT DEFICIT DAMPENS THE STOCK MARKET SENTIMENT, A BIG OIL INVENTORY RISE

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

Biggest Current Account Deficit

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:

  • Current account balance came at -$291.4B vs. -$279B consensus.  This is the biggest current account deficit since 1960.  Current account deficit is the net of export, imports, and transfer of capital. In simple terms, the United States transferred significant wealth to other countries, primarily China.  This is one mechanism through which China is becoming relatively richer and the United States is getting relatively poorer.
  • This morning in the early trade the momo crowd was aggressively buying stocks.  The release of the big current account deficit number took steam out of the rally and dampened the sentiment.
  • Expect the momo crowd to buy the dip and try to run up the stock market again.
  • The chart shows that the stock market is at the low band of the support/resistance zone.
  • The chart shows that in spite of aggressive buying  by the momo crowd, the market has not made significant progress.
  • RSI on the chart shows that it is triggering a very mild buy signal.
  • Powell is in front of Congress again.  Q&A has the potential to move the market.

Jobless Claims

Initial claims came at 239K vs. 230K 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 🔒 gold in the early trade.  Smart money is 🔒 in the early trade.

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

Oil

API came at a build of 5.607M barrels vs. consensus of a draw of 1.433M barrels. This is the biggest inventory rise since mid February.  A part of the rise is due to the Department of Energy releasing 6.8M barrels from the strategic petroleum reserve in the prior week.

EIA data will be released later today and may be market moving.

The momo crowd is 🔒 oil in the early trade.  Smart money is 🔒 oil 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 🔒 as the market direction will depend on Powell’s Q&A.  However, expect the market to open higher.  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 2-year Treasury yield briefly dipped below 3%.

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 $1834, silver futures are at $21.19, and oil futures are $106.15.

S&P 500 futures resistance levels are 3860, 3950 and 4000: support levels are 3630, 3600 and 3520.

DJIA futures are up 72 points.

 

THE MUST SEE CHART FOR PRUDENT INVESTORS ABOUT WHAT MATTERS THE MOST RIGHT NOW

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

The Must See Chart

Please click here for a chart of the Fed funds rate going back to 1972.

Note the following:

  • The most important point for the markets right now is the terminal Fed rate. The second most important is how fast the Fed gets to the terminal rate.
  • The chart shows the Fed funds rate at different times in history. The take away from the chart is that there is a historical precedence for the terminal rate going much higher than what is discounted in stock prices right now.
  • The stock market is discounting a terminal rate of about 2.5%. One big problem with the assumption about terminal rate by the market is that the Fed has already told us that the rate will be about 3% by the end of 2022 and 3.3% in 2023.
  • How good is the Fed at predictions? As late as March, the Fed was indicating a terminal rate of 1.75%.  The Fed has jumped from 1.75% to 3.3% in a matter of three months.
  • Take a close look at the chart. There is not insignificant probability of the terminal rate going to 4% – 5% if inflation does not cool.
  • If the Fed terminal rate goes to 4% – 5%, S&P 500 can easily fall below 3,000. Before you get too concerned, it is important to understand that this is just one credible scenario. There are many scenarios that would result in the stock market running up to S&P 500 level of 4,500.
  • Be very careful when listening to the talking heads in the media who claim to know what the terminal Fed rate will be. Plus, Powell himself has told the world that the Fed with all of its intellectual horsepower does not know what the terminal Fed rate will be. The truth is that nobody knows.
  • There are two parts to inflation that we are seeing – supply constraints and demand.
  • There is nothing that the Fed can do about supply constraints. The only thing that the Fed can do is reduce  demand.
  • In our analysis at The Arora Report, the supply constraints are likely to be resolved relatively soon. The high frequency leading data that we are seeing at The Arora Report is showing that the Fed’s actions are already beginning to reduce  demand.
  • If it was not for the stickiness of wages and rents, our models could predict a terminal Fed funds rate and where the stock market is going with a fairly high probability.  However, we expect wages to be sticky. They may not rise from here, but bosses are not likely to go to workers and ask them to take wage cuts to pay for the free money bandwagon that our government was on for a long time. We expect rents to continue to increase, but we expect home prices to fall.  The reason is that over the last two years, rents did not keep up with rising home prices.
  • There is another important element that may constrain the Fed – more than $30 trillion of national debt. If interest rates continue to rise, the government is not going to be able to make interest payments without causing severe pain for investors and those in the lower income group who depend on government programs. All investors should consider listening to the very important podcast “Protect Yourself: The Dirty Secret Of The President And The Fed.”
  • The solution is not to get out of the market. The Fed is talking about reducing future inflation. They are not even talking about taking back a part of the inflation that has occurred over the last two years.  The fact is that your dollars have eroded by over 15% in real terms in the last two years.
  • To guard against erosion of the dollar, you have no choice but to invest.  
  • The solution is to become more knowledgeable and more nimble.
  • Powell is testifying before the Senate. His testimony and Q&A may provide some insights into the terminal Fed funds rate and the speed of the hikes towards the terminal rate.
  • The biggest potential danger to your wealth is a prolonged period of stagflation. This is why it is important for investors to become knowledgeable about stagflation.
See also  HOTTER CPI – MOMO CROWD USING HOPE STRATEGY GETS BURNED AGAIN

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 stocks in the early trade. There is angst about Powell’s testimony and fear of a recession.

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

Oil is down about 4.5% as of this writing on recession fears and Biden proposing a federal gas tax holiday. The federal tax on gas is $0.18 per gallon. The proposal requires approval by Congress.

The momo crowd is 🔒 oil in the early trade. Smart money is 🔒 oil 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 🔒 because the market will depend on Powell’s testimony. 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 $1840, silver futures are at $21.45, and oil futures are $104.78.

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

DJIA futures are down 308 points.

See also  APPLE NEWS WARNS OF A POTENTIAL BULL TRAP

 

WALL STREET IS FRONT RUNNING REBALANCING LEADING TO A RALLY IN THE STOCK MARKET

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

Quarter End Rebalancing

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 NASDAQ 100 ETF QQQ and bond ETF TLT.
  • The chart shows that so far in this quarter QQQ has lost 24.57%, SPY has lost 19.91%, and TLT has lost 14.74%.
  • In quarter end rebalancing, investors will sell bonds and buy stocks. This is  an age old tradition. The argument is that stocks should be bought because they have gone down more than bonds.
  • Wall Street is front running the rebalancing.
  • The market has been very oversold. As the market moves up, the momo crowd is buying, believing that the bottom is in. Of note is that the momo crowd has called the bottom dozens of times so far this year, only to see the market go lower.
  • If the market moves further, there is potential for a vicious short squeeze.
  • As a full disclosure, a signal was given for super aggressive investors on Friday before the big rally that is occurring to buy triple leveraged ETF TQQQ as a short term trade. In the early trade, the TQQQ trade is profitable.
  • Over the long weekend, there have been many warnings of a potential severe recession. At the same time, permabulls are claiming that a recession can be avoided.
  • The sum total of the foregoing as an action 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

Over the weekend, bitcoin dipped below $18,000. This was a big blow to bitcoin bulls as they were counting on the support at $20,000 holding.

There are unverified rumors that when bitcoin dipped Binance, a large crypto exchange, and other exchanges bought billions of dollars worth of bitcoin to prevent bitcoin from going into a freefall. As the price started moving up, dip buyers jumped in hoping that the bottom was in. As bitcoin moved above $20,000, it started a vicious short squeeze.

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 $1839, silver futures are at $21.72, and oil futures are $110.07.

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

futures are up 429 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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