Powell's Flip Risk Stock Market Animal Spirits Running Wild

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

Deploy Cash And Reduce Hedges

This is a reminder of the prior calls to deploy cash and reduce hedges. Please see prior posts for details.

New Historic High

Please click here for a chart of SPDR Dow Jones Industrial Average ETF Trust DIA.

Note the following:

• The chart shows Dow Jones Industrial Average has just hit a new historic high.
• The chart shows a breakout in DIA.
• The chart shows the trendline underlying the recent rally.
• The chart shows that the slope of the trendline is very steep, and now the stock market is going parabolic with even steeper ascent. Historically, such a move is not sustainable beyond a short time. Often, there is a pullback due to a reason no one is thinking about right now.
• The chart shows that RSI is very overbought and is diverging from the price. This indicates that the stock market is primed for a pullback as soon as momentum wanes.
• In The Arora Report analysis, the tentative call is to use pullbacks to buy stocks.
• Working against a pullback are three market mechanics that are pushing the stock market higher. These market mechanics are the following:
  • Year end chase
  • Positioning
  • 0DTE
• Now in The Arora Report analysis, after Powell’s flip yesterday, the probability of another market mechanic of market maker gamma squeeze pushing the stock market higher has dramatically gone up. If a market maker gamma squeeze starts, the rate of ascent of the market will become steeper even after the recent steep rise.  Understanding the market mechanic of gamma squeeze can give you a big edge. The easiest way to understand the market mechanic of gamma squeeze is to listen to the podcast titled “Market Mechanics: Impact Of Dealers’ Gamma Position Change On The Stock Market.”  
• Yesterday, Powell completely flipped from what he said two weeks ago. Why did Powell flip?  All you have to do is take a look at the dot plot that the Fed issued yesterday. In view of the dot plot, Powell had no choice but to flip. If Powell had not flipped, he would have looked like a fool.
• By flipping, Powell and the Fed are taking a big risk. The risk is of animal spirits going wild in the stock market. If the stock market rises parabolically, it will loosen financial conditions and potentially bring inflation back.
• The data released this morning does not support Powell’s flip. One has to wonder if the Fed did not have access to the data that was released this morning when they made the decision.
• The two most important pieces of data released this morning are retail sales and jobless claims.  
• Retail sales shows that after a brief lull, consumer splurge is accelerating again.  Here are the details:
• Headline retail sales came at 0.3% vs. -0.1% consensus.
• Retail sales ex-auto came at 0.2% vs. 0.0% consensus.
• Weekly Initial Claims came at 202K vs. 222K consensus. This indicates the job picture is extremely strong. Weekly Initial Claims is 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.
• In The Arora Report analysis, prudent investors need to be very mindful that the risk to the market and The Arora Report bullish call is that if the data continues strong like this morning, Powell and the Fed may have no choice but to flip again.  
  • Investors who are committed to maximizing the wealth they generate over their lifetime need to be focused on risk adjusted returns, not just returns. Focusing on risk adjusted returns is the key. The Arora Report is a rare service that helps you generate high risk adjusted returns which in turn maximize the wealth you generate over your lifetime.
• Inflation adjusted 10-year yield has now fallen to 1.76%.
• Investors need to be mindful that going forward, diversification beyond the Magnificent Seven may become very important. 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. As an early indicator, take a look at yesterday’s price action. The Magnificent Seven rose 0.7%, while iShares Russell 2000 ETF IWM which represents small caps rose 3.5%.  
  • We will be adding small caps and micro caps to ZYX Allocation Model Portfolios. As an important tip, if you are interested in accelerating wealth generation, read the section titled “Accelerating Wealth Generation” in the Trade Management Guidelines. You can significantly increase your risk adjusted returns by dividing your money between ZYX Buy, ZYX Allocation, ZYX Short, and ZYX Emerging. This is an evergreen strategy that has worked beautifully under all market conditions, over the last 16 years, including the period of great financial crisis.
• 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.

European Central Bank

The European Central Bank (ECB) left rates unchanged. The market is expecting six rate cuts from the ECB.

ECB sees 2025 inflation at 2.1%. ECB will also accelerate exiting from $1.8T of pandemic stimulus.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Amazon, Nvidia, Alphabet, Tesla, and Apple.

In the early trade, money flows are negative in Microsoft and Meta.

In the early trade, money flows are positive in SPDR S&P 500 ETF Trust 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 🔒 stocks in the early trade. To see the locked content, please click here to start a free trial.

Gold

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

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

Crypto promoters were proclaiming that Bitcoin BTC/USD would run to $50,000 after the Fed announcement. Bitcoin has not run after the Fed announcement in the way crypto promoters had proclaimed. Expect crypto promoters to have a new narrative to run up bitcoin.

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.