Fed Credibility At Stake - Wall Street Positioned For 50 BPS Cut And Highly Dovish Comments

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

Fed Credibility At Stake

Please click here for an enlarged 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 that the stock market is near the resistance zone.
• The chart shows that the rally has been on low volume.  This indicates a lack of conviction.
• The chart shows that RSI has just entered the overbought zone.  This indicates that the stock market can go either way.
• The chart shows that if the stock market does not break out and turns down from here, it will be tracing a triple top.  A triple top is a negative pattern.
• FOMC will announce its rate decision at 2pm ET today and will be followed by Powell's press conference at 2:30pm ET.
• Understanding Wall Street positioning can give investors a big edge.  Wall Street is positioned for a 50 bps cut and highly dovish comments.
• In The Arora Report analysis, the totality of data does not justify a 50 bps cut.  Further in The Arora Report analysis, the totality of data does not justify very dovish commentary. 
• In The Arora Report analysis, if the Fed complies with the momo crowd's demands, the Fed's credibility will be hurt in the long run.  There may be unintended consequences.  One unintended consequence may be a rise in long term yields in due course.  The other potential unintended consequence may be an unhealthy drop in the dollar.    
• If the momo crowd gets what they want, S&P 500 at 6000 is a magnet for traders.
• If the momo crowd gets what they want, the momo crowd will aggressively buy.  However, it is not clear how smart money will react.  There is a fair probability of smart money taking advantage of the strength to sell.
• If the Fed cuts by 25 basis points, then the market reaction will depend on commentary and the dot plot.
• In The Arora Report analysis, if the Fed cuts by 25 bps and the commentary is not dovish, there is a downside risk to the stock market. 
• Prudent investors need to be very mindful that the Fed is about to cut interest rates at a time when the stock market is near its all time high, house prices are near all time highs, and the economy is strong.  Historically, the Fed cuts interest rates when the economy is weak or in recession, house prices are falling, and the stock market is weak.  By aggressively cutting interest rates now accompanied by highly dovish commentary, the Fed risks its long term credibility.    Highly dovish action now also has the potential to start rampant speculation in stocks, housing, and cryptos.
• A 50 bps cut and highly dovish commentary will be helpful for a Harris election.  The Fed will never admit it, but there is a school of thought that the Fed wants to help Harris win the election.  The reason is that Trump has already said he will not reappoint Powell.  Further, Trump has said that he will interfere with the Fed.

Housing Starts

Housing starts came at 1356K vs. 1320K consensus.

Building permits came at 1475K vs. 1415K consensus.

In The Arora Report analysis, activity among builders is increasing as they anticipate falling interest rates will let loose pent up demand.  This will increase economic activity, which in turn is good for the stock market. 

Magnificent Seven Money Flows

In the early trade, money flows are positive in Apple Inc AAPL, Alphabet Inc Class C GOOG, Meta Platforms Inc META, Microsoft Corp MSFT, and Tesla Inc TSLA.

In the early trade, money flows are neutral in Amazon.com, Inc. AMZN and NVIDIA Corp NVDA.

In the early trade, money flows are positive in SPY and Invesco QQQ Trust Series 1 QQQ.

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust GLD.  The most popular ETF for silver is iShares Silver Trust SLV.  The most popular ETF for oil is United States Oil ETF USO.

Bitcoin

Bitcoin BTC/USD is seeing buying in anticipation of a 50 bps rate cut.  Bullish crypto gurus are hopeful that a 50 bps cut will take bitcoin to a new high.

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.

A protection band of 0% would be very bullish and would indicate full investment with 0% in cash.  A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.

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 five 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 big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, the DJIA rally to 30,000 when it was trading at 16,000, the start of a mega bull market in 2009, and the financial crash of 2008. Please click here to sign up for a free forever Generate Wealth Newsletter.