Fed's Problem: How To Slow Down The Runaway Stock Market Train Driven By Market Mechanics

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

The Fed’s Problem

Please click here for a chart of Invesco QQQ Trust Series 1 QQQ.

Note the following:

• The chart shows that the stock market has had a significant rally since the beginning of November.
• The chart shows Arora buy signals.
• The chart shows that the stock market is consolidating right at the low band of the resistance zone.
• RSI shows that the stock market can go either way but the probability to the upside is higher.
• CPI data will be released tomorrow at 8:30am ET, and PPI will be released on Wednesday at 8:30am ET. Both have the potential to move the stock market, but the market will really be waiting for the Fed.
• The FOMC meeting starts tomorrow. The FOMC rate decision will be announced Wednesday at 2pm ET followed by Powell’s press conference at 2:30pm.
• The Fed has a problem. In The Arora Report analysis, the rise in the stock market has considerably loosened financial conditions. Financial conditions have become significantly looser than the Fed likely wants at this time.
• In The Arora Report analysis, the Fed needs to be very careful as the stock market is positioned to twist whatever the Fed and Powell say to move the runaway stock market train faster. Here is the key question for investors: Will the Fed be able to put the breaks on the runaway stock market train?
• The primary driver behind the runup in the stock market is a group of three market mechanics. Historically, market rallies driven by these market mechanics at this time of the year take a pause or even have a slight pullback right about now, before another leg up.  The tentative plan is to use any pullback to buy. The more you understand about market mechanics, the more money you will extract from the markets. To help you, a new podcast titled “Market Mechanics Trump Mother Of All Reports – A Look Ahead” is in production.  The podcast will be in Arora Ambassador Club.  
• Two other factors driving the stock market higher are the following:
  • AI frenzy
  • Consensus of five rate cuts in 2024
• 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.

Deflation In China

China is now experiencing deflation.

• November CPI came at -0.5% month-over-month vs. -0.1% consensus.
• November PPI came at -3.0% year-over-year vs. -2.8% consensus.

In The Arora report analysis, since the U.S. is a huge importer of Chinese goods, deflation in China is helping inflation in the U.S. come down.  

Stocks in China first fell and then came back on hopes of government stimulus.

Japan

The yen fell on an attempt to walk back earlier comments about raising rates.

In the Japanese stock market, Nikkei rose 1.5%.

Magnificent Seven Money Flows

In the early trade, money flows are positive in NVIDIA Corp NVDA and Tesla Inc TSLA.

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, and Microsoft Corp MSFT.

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

Momo Crowd And Smart Money In Stocks

The momo crowd is buying stocks in the early trade. Smart money is 🔒 in the early trade. To see the locked content, please click here to start a free trial.

Gold

The momo crowd is selling 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

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 dropped on disappointment that whales did not take advantage of low liquidity during the weekend to run up bitcoin. Bitcoin bulls were hoping for a run to $50,000. Instead, it appears that whales took profits and sold bitcoin to retail investors around $45,000, while building a narrative of bitcoin going higher. Bitcoin is trading at $41,949 as of this writing in the premarket.

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 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 external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.