Investors Elated On CPI Data, Dr. Copper At A New High On Short Squeeze

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

Cooler Inflation Data

Please click here for an enlarged 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 is breaking out above the resistance zone.
• The chart shows a highly unusual occurrence – RSI is at 100. This is the most extreme overbought level. The extreme overbought level indicates that either the stock market is ready for another strong up leg, or the breakout is going to fail.
• Sentiment is extremely positive. At extremes, sentiment is a contrary indicator. In plain English, extreme positive sentiment is a sell signal. However, it is important to remember that sentiment is not a precise timing indicator.
• In The Arora report analysis, based on the other macro and fundamental data, there is about a 40% probability that the breakout will fail even though technicals are very strong.
• Consumer Price Index (CPI) came slightly cooler than expected. Here are the details:
  • Headline CPI came at 0.3% vs. 0.4% consensus.
  • Core CPI came at 0.3% vs. 0.3% consensus.
• As most investors are elated over the CPI number, prudent investors need to remember that on an annualized basis, core CPI is still 3.6%. The Fed’s target is 2%. Further, prudent investors need to remember that goods inflation is coming down due to over production in China, but services inflation is still sticky.   
• The U.S. economy is 70% consumer based. For this reason, prudent investors pay attention to retail sales. Here is the latest retail sales data.
  • Headline retail sales came at 0.0% vs. 0.4% consensus.
  • Retail sales ex-auto came at 0.2% vs. 0.2% consensus.
• Retail sales data shows that the consumer is finally pulling back. This will negatively impact earnings. In the long run, the single best determinant of the stock market is earnings. However, at least for today, elated investors are not thinking far ahead about earnings.
• It is said that copper has a Ph.D. in economics. That is why it is called Dr. Copper.  When the economy is booming, demand for copper goes up. In recessions, demand for copper drops. Copper futures in New York just hit a new high. Copper is also heavily used in electric vehicles and solar panels. Heavy demand for electricity by artificial intelligence data centers will also increase copper demand.
• In The Arora Report analysis, the new high in copper is not indicative of the economy but is due to a vicious short squeeze. The trigger for the short squeeze is investors looking for a derivative play on artificial intelligence.  
  • As full disclosure, one of the largest copper producers Freeport-McMoRan Inc FCX is in The Arora Report's ZYX Buy Model Portfolio.  FCX operates in both North and South America, but its most important mines are in Indonesia.  iShares MSCI Indonesia ETF EIDO is in The Arora Report's ZYX Emerging Model Portfolio.
  • As full disclosure, a copper producer First Quantum Minerals Ltd FQVLF is in The Arora Report's ZYX Buy in the portfolio that surrounds the core Model Portfolio.  FQVLF is a Canadian company that is a buyout target.  
  • For those who like ETFs, SPDR S&P Metals & Mining ETF XME as well as commodities ETF Invesco Optimum Yld Dvsfd Cmd Str No K-1 ETF PDBC are in The Arora Report's ZYX Allocation Model Portfolio.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Alphabet Inc Class C GOOG, Meta Platforms Inc META, NVIDIA Corp NVDA, and Tesla Inc TSLA.

In the early trade, money flows are neutral in Apple Inc AAPL, Amazon.com, Inc. AMZN,  and Microsoft Corp MSFT.

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 inactive in the early trade.

Note for new members: Smart money often sells into the strength generated by momo crowd buying and buys into the weakness generated by momo crowd selling. Over a long period of time, investors come out ahead by adopting smart money’s ways. The exception is in a raging bull market – for very, very short term trades, consider following the momo crowd and not smart money.

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.

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 draw of 3.104M barrels vs. a consensus of a draw of 1.350M barrels.

The momo crowd is selling 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 aggressively bought on lower CPI. This again busts the myth propagated by the whales that bitcoin is an inflation hedge. The hard data shows that bitcoin is not an inflation hedge, but rather an instrument for speculation.  

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 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.

A protection band of 0% would be very bullish and would indicate full investment with 0% in cash.  A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.

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.