Hotter Consumer Inflation Will Test Stock Market Bulls' Trust In Market Mechanics

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

Hotter Consumer Inflation

Please click here for a 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 ran up above the top band of the top support zone in anticipation of better than expected Producer Price Index (PPI) and Consumer Price Index (CPI) as well as the market mechanics of year end chase and market positioning.
• Yesterday, we shared with you that PPI came hotter than expected, but bullish investors chose to ignore it. Please read yesterday’s Capsules for more on PPI. Bullish investors chose to pin their hopes on CPI coming better than expected and market mechanics.
• This morning, CPI came worse than expected. Here are the details:
  • Headline CPI came at 0.4% vs. 0.3% month-over-month consensus.
  • Core CPI came at 0.3% vs. 0.3% month-over-month consensus. Of special note is that the whisper numbers for Core CPI were 0.2%. 
  • Wall Street was positioned for 0.2% Core CPI.
• Now, there are two strikes against Wall Street positioning and bulls’ hopes in the form of PPI and CPI.
• Stock futures were running up ahead of the release of CPI on hopes of better than expected numbers. On release of CPI, the stock market took a slight dip. The momo crowd aggressively bought the dip and is trying to run up the stock market as of this writing.
• In The Arora Report analysis, even though progress is being made on inflation, core inflation is staying sticky, way above the Fed’s 2% target. This means that the Fed is likely to keep rates higher for longer but may be reluctant to raise rates. You may recall that The Arora Report’s call for a while has been that core inflation will stay sticky. So far, that call is spot on.
• Earnings season starts tomorrow, although a fair number of earnings were reported this morning. Earnings are expected to be inline with consensus; however, earnings this morning are mixed.
• Going forward, bulls’ faith in market mechanics to run up the stock market will be tested as their predictions on the data have been wrong.
• Here are the probabilities of Fed interest rate hikes:
  • 10% in November
  • 33% in December
• Initial jobless claims came at 209K vs. 214K consensus. This indicates that the job picture, especially at the low end, remains very strong. The job picture remains weak in information technology. During the pandemic, information technology had the strongest demand. Initial jobless claims are a leading indicator and carries heavy weight in our adaptive ZYX Asset Allocation Model with inputs in ten categories. In plain English, adaptiveness means that the model changes itself with market conditions. Please click here to see how this is achieved. One of the reasons behind The Arora Report’s unrivaled performance in both bull and bear markets is the adaptiveness of the model. Most models on Wall Street are static. They work for a while and then stop working when market conditions change.
• 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.

India

Inflation in India slowed and has now come back to the target zone set by the Reserve Bank of India. CPI came at 5.02% year-over-year vs. 5.50% consensus.

In The Arora Report analysis, this is good news.  However, even though India is the best large economy opportunity for long term investors, in the short term, India’s stock market is overbought and valuations are too high. If the Indian market dips, it will be a buying opportunity. To see the buy zone for India and The Arora Report’s short term, medium term, and long term ratings, please see ZYX Emerging. ZYX Emerging has continuously covered India for 16 years.

China

China’s sovereign wealth fund, which is controlled by the Chinese government, bought more stock in China’s largest banks. As this has not happened since 2015, speculation is growing that the Chinese government will increase its efforts to help the Chinese stock market.

In The Arora Report analysis, this maneuver by the Chinese government will only have a limited impact on the stock market.  

Magnificent Seven Money Flows

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

In the early trade, money flows are negative in Microsoft Corp MSFT and Tesla Inc TSLA.

In the early trade, money flows are mixed in SPDR S&P 500 ETF Trust 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 🔒 stocks in the early trade.

Gold

Gold is attempting to break the psychological resistance at $1900. 

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

API crude inventories came at a build of 12.94M barrels vs. a consensus of a build of 1.3M barrels.

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

For longer-term, please see oil ratings.

The most popular ETF for oil is United States Oil ETF USO.

Bitcoin

Bitcoin BTC/USD bulls are getting concerned that bitcoin may be forming a head and shoulders pattern. This is a negative pattern. Bitcoin is trading under $27,000 as of this writing.

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.

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 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.

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 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.