Tesla Move On Rivian News Shows The Reality Of Investors, Powell Testimony, India Ascendant

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

Exuberance Without Analysis

Below is a chart of Tesla Inc. TSLA.

Note the following:

• The Morning Capsule is about the big picture, not an individual stock. The chart of Tesla stock is being used to illustrate the point.
• Tesla is a great company. None of the following is a commentary on Tesla. The purpose here is solely to illustrate the behavior of investors right now. It is important for prudent investors to understand this behavior.
• The chart shows when the news broke that Ford Motor Co. F was going to use Tesla’s charging network. This news was truly a big deal. The subsequent move in Tesla stock is justified. 
• The chart shows when the news broke that General Motors Co. GM was going to use Tesla’s charging network. The news made it inevitable that Tesla would become the charging standard in the U.S. The move up in Tesla stock on the news is justified.
• After Ford and General Motors joined Tesla’s charging network, it was expected that there would be announcements over the coming days from other automakers about joining Tesla’s charging network. This expectation resulted in a further move in Tesla’s stock.
• The chart shows when the news broke that Rivian RIVN will use Tesla’s charging network. Here are the key points:
  • On the Rivian news, Tesla stock added about $40B in market capitalization. (If the calculation is started not when rumors started but when the news broke, the increase in market capitalization is $24B.
  • In the after hours, investors excited about Rivian news continued to aggressively buy Tesla stock, adding another $10B in market capitalization for a total add of $50B. (Some bulls will contend that part of the rise was due to India news, but that is nonsense as India news was widely expected and discounted in the stock.)
  • All in all, investors added $50B to Tesla’s market capitalization on the Rivian news. This is on top of $240B in market capitalization investors added on Ford and General Motors news prior to Rivian news.
  • Rivian hardly has any vehicles on the road.
  • Even in an optimistic scenario, Rivian will likely add less than $50M to Tesla’s profit.
  • The sum total is that in an optimistic scenario, a profit of less than $50M added $50B in market capitalization.

• Prudent investors should ask a very simple question, “Are investors doing any analysis before risking their money?”
• The foregoing illustrates the current state of exuberance in the stock market.
• Sentiment has now turned very positive according to The Arora Report proprietary indicators. These proprietary indicators provide members of The Arora Report with a significant edge in the markets.  It is not extremely positive yet.  When sentiment turns extremely positive, it is a contrary signal.  In plain English, this means a sell signal.

Powell Testimony

Powell will testify in front of Congress today and tomorrow. Will Powell take on the momo crowd in Q&A?  The momo crowd and the Fed are at complete odds.  

• Most of the momo crowd believes the Fed will cut interest rates three times this year.
• The Fed says it plans to increase interest rates twice this year.

The Fed has released prepared remarks from Powell. Here are the key points:

• Inflation remains over the 2% goal.
• The economy is facing headwinds from tighter credit.
• Reducing inflation is likely to require a period of below trend growth.
• Reducing inflation will need softening labor market conditions or higher unemployment.

Stark Reminder From U.K.

The momo crowd is running up the stock market on the belief that the fight against inflation is over.  The latest data from the U.K. shows that the momo crowd's belief is wrong. Future data in the U.S. may turn out similar to the U.K. Inflation in the U.K. is running hotter than expected. Here are the details:

• In the U.K., CPI came at 8.7% year-over-year vs. 8.4% consensus.
• CPI came at 0.7% month-over-month vs. 0.5% consensus.
• Core CPI came at 7.1% year-over-year vs. 6.8% consensus.
• Core CPI came at 0.8% month-over-month vs. 0.6% consensus.

The data may force Bank of England’s hand to raise interest rates again.

Modi Visits U.S.

India’s Prime Minister is visiting the U.S. The purpose of the visit is to strengthen ties between the two countries and contain China.  Here are the key points:

• India is ascendant. 
• India is already a world leader in providing information technology services.
• Now, manufacturing is increasingly moving out of China and into India.
• Foreign money is rushing into Indian stocks.
• Tesla CEO Musk met with Modi. Modi has invited Musk to make investments in India in the space and electric vehicle sectors. 
• India is the largest opportunity for long term investors in the coming years.  
• ZYX Emerging has covered India continuously for 16 years.

Momo Crowd And Smart Money In Stocks

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

Gold

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.

Oil

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.

Bitcoin

Enthusiasm continues in bitcoin BTC/USD on BlackRock Inc. BLK filing for a bitcoin ETF.

Markets

Our very, very short-term early stock market indicator is indeterminable at this time and will depend on how Powell answers the questions. 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 21% - 39% in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 3% - 6%, and short term hedges of 5% - 8%. 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.