Raise Cash, New Data Shows Hotter Inflation – Momo Gurus Wrong Again, Bull Market Intact

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

Raise Cash

It is time to increase cash by 4%. Hedges were recently raised. Please see the protection band section below.

The bull market is intact, but the probability of a pullback has gone up. As full disclosure, the tentative plan for The Arora Report is to buy the pullback.  

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 that the stock market has broken the upward sloping trendline that has defined the rally.
• The chart shows the Arora call to raise hedges prior to the drop.
• The chart shows the support zone from which the breakout occurred. The tentative plan is to buy if the stock market pulls back to the support zone. However, this will need to be adjusted – read the next point.
• The probability of the stock market pulling back to the support zone is less than 50%. The reason is that the buy the dip crowd is already aggressively buying the dip and is prepared to aggressively buy more.  
• The new data shows that inflation is hotter than expected. Here are the details:
  • Headline CPI came at 0.4% vs. 0.3% consensus.
  • Core CPI came at 0.4% vs. 0.3% consensus.
• As a reference, the new data equates to inflation at an annualized rate of 4.8%. The Fed’s target is 2%.
• In The Arora Report analysis, this time, the momo gurus are going to have difficulty persuading their followers to buy stocks. One reason is that momo gurus have been wrong at every step of the way this year.  Having said that, do not underestimate the cleverness of momo gurus to come up with a new narrative to persuade investors to buy stocks.  At the same time, do not underestimate the power of greed in the momo crowd. The momo crowd is very easy to influence because at best, the momo crowd does shallow analysis and is driven by the herd mentality.
• It is worth repeating that the bull market is intact.  
• It is also worth repeating that the tentative plan is to buy on a pullback.  
• It is also worth repeating that you can buy the pullback only if you are holding enough cash or you have hedged positions.   
• Notwithstanding the foregoing, nothing is cast in stone.  Prudent investors stay flexible and respond to new data as it comes in. The foregoing is only the most probable scenario, but it can change rapidly. For this reason, it is important to regularly read the Morning Capsules.

Buy Zones And Buy Now Ratings

Consider not starting any new positions from the long side unless there is a specific post or there is an inverse ETF.

Starting new positions from the short side is fine.

This tentative plan will change as new data comes in. Consider being patient and staying tuned.

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 SPY and Invesco QQQ Trust Series 1 QQQ.

Momo Crowd And Smart Money In Stocks

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

Gold

The momo crowd is buying gold in the early trade. Smart money is selling gold 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 3.034M barrels vs. a consensus of 2.415M barrels.

The momo crowd is buying oil in the early trade.  Smart money is inactive 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 is being sold on hotter inflation data. This shows again the false narrative that bitcoin have promoted of bitcoin being a hedge against inflation.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

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 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.

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