Momo Crowd Stock Market Nirvana Of Cooling Inflation And No Recession Contradicted By Import Data

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

Contradiction

Please click here for a chart of Industrial Select Sector SPDR Fund XLI.

Note the following:

• As the momo crowd in the stock market feels the nirvana of cooling inflation, no recession belief, and expanding breadth of the rally, import data strongly contradicts the bullish beliefs.  However, right now, the momo crowd is oblivious and buying stocks. Prudent investors are paying attention to the import data.
• The chart shows that industrials have broken out. Industrials are very sensitive to the economy and get hurt in a recession.
• The fact that industrials have broken out shows that the predominant belief of stock market investors is that there will be no recession.
• The data from China directly contradicts the conclusion of stock market bulls in the U.S. that there will be no recession.
  • The U.S. is a major importer of Chinese goods. In the case of many goods, there are no reasonable alternatives to China.
  • Chinese exports to the U.S. dropped about 24%. This is the worst number since March 2020.
  • The data from China shows that consumers’ buying of goods in the U.S. is definitely slowing.
• Producer Price Index (PPI) came cooler than expected. Here are the details:
  • Headline PPI came at 0.1% vs. 0.2% consensus.
  • Core PPI came at 0.1% vs. 0.2% consensus.
• Jobless claims came at 237K vs. 247K consensus. This is a leading indicator and carries heavy weight in the adaptive ZYX Asset Allocation Model with inputs in ten categories. The model has a great track record in both bull and bear markets.
• On a bullish note, the rally is expanding beyond the AI frenzy driven rally in the magnificent seven stocks. The magnificent seven stocks are 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.
• Earnings season has started. Among the important earnings, earnings from insurance company Progressive Corp PGR and construction support company Fastenal Co FAST are worse than expected.  Earnings from airline Delta Air Lines, Inc. DAL and snack and beverage company PepsiCo, Inc. PEP are slightly better than expected.
• Buyouts are picking up. Exxon Mobil Corp XOM is buying Denbury Inc DEN. However, the price offer for Denbuy is a disappointment.
• As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

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 buying 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

Bitcoin is range bound.

Markets

Our very, very short-term early stock market indicator is positive but can quickly turn negative. 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.

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.