Inflation Hotter Than Expected But Momo Gurus Have A New Narrative To Buy Stocks

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

Hotter Inflation

Please click here for an enlarged version of the chart of SPDR S&P 500 ETF Trust SPY which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

• The chart shows a slight pullback on inflation data.
• The chart shows volume continues to be low, indicating lack of conviction.
• The volume today will be a tell. If the stock market pulls back on heavy volume on bad inflation data, that will be an indication that the bulls are losing control. On the other hand, if the stock market has only a shallow pullback or goes up on lower volume, that will be an indication that bulls continue to be in control.
• CPI was worse than expected. Here are the details:
  • Headline CPI came at 0.3% month-over-month vs. 0.2% consensus.
  • Core CPI came at 0.4% month-over-month vs. 0.3% consensus.
• In yesterday’s Morning Capsule, we shared with you:

Momo gurus are already being proactive to prevent a selloff if the data shows that inflation is not coming down. The new mantra of momo gurus is that stocks will go up even if inflation does not come down. Keep in mind that momo gurus’ real job is to run up the stock market under the disguise of analysis.

• Momo gurus are extremely clever. Realizing that their new narrative was not that good, now they have come up with a more persuasive narrative to persuade their followers to buy stocks. The new narrative is that this rise in inflation is a one-off.
• The CPI data today shows that Powell’s fear of Burns’ blunder is justified. Arthur Burns was the most intelligent Fed Chairman. He lowered rates when inflation came down but was forced to raise rates again when inflation picked up again. This is known as Burns’ blunder.
• New earnings are having an impact on the stock market.
  • Earnings from artificial intelligence darlings Arista Networks Inc ANET and Cadence Design Systems Inc CDNS are worse than expected. This is causing a pullback in AI stocks.
  • Earnings from a momo crowd favorite stock Shopify Inc SHOP are less than expected.
  • On the flip side, earnings from Warren Buffett’s favorite Coca-Cola Co KO are better than expected.
• As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the protection band.

Magnificent Seven Money Flows

In the early trade, money flows are negative in Apple Inc AAPL, Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOG, Meta Platforms Inc META, Microsoft Corp MSFT, NVIDIA Corp NVDA, and Tesla Inc TSLA.

In the early trade, money flows are negative in SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust Series 1 QQQ.

Momo Crowd And Smart Money In Stocks

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

Gold

Gold is coming under pressure on higher hotter CPI. In the long term, gold is an inflation hedge, so why is it falling on hotter inflation? The reason is that in the very short term, gold is sensitive to interest rates.  

Understanding the behavior of not only gold but also other assets in response to macro data can give you a big edge.  

The momo crowd is selling gold in the early trade. Smart money is inactive in the early trade.

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

The most popular ETF for gold is SPDR Gold Trust GLD. The most popular ETF for silver is iShares Silver Trust SLV. 

Oil

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

For longer-term, please see oil ratings.

SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust Series 1 QQQ.

Bitcoin

Bitcoin BTC/USD is range bound. If speculative junk stocks get hit, negative sentiment will likely carry to bitcoin. 

Also be careful because whales tend to book profits by off loading bitcoin to mom and pop after a run up to round numbers.  

Bitcoin miners are being sold after the release of CPI data.  

Protection Band 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 a protection band consisting of cash or Treasury bills or short-term tactical trades as well as short to medium term hedges and short term hedges. 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.

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 seven 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.

The Arora Report is known for its accurate calls. The Arora Report correctly called the 2008 financial crash, the start of a mega bull market in 2009, the COVID crash, the post-COVID bull market, and the 2022 bear market. Please click here to sign up for a free forever Generate Wealth Newsletter.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.