Hotter Core CPI Upsets Stock Market Bulls' Hopium, Buying Ahead Of Nvidia's Jensen Huang Speech

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

Hotter Core CPI

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 a slight pullback in the stock market after the release of CPI this morning.
• The chart shows that the stock market has made a double top in the resistance zone.  In the short term, this is a negative pattern.
• The chart shows that the stock market is consolidating between the support zone and resistance zone.
• RSI on the chart shows that the stock market has bounced from being very oversold and is now situated such that it can go either way.
• Core inflation data at the consumer level came hotter than expected.  Here are the details:
  • Headline CPI (Consumer Price Index) came at 0.2% vs. 0.2% consensus.
  • Core CPI came at 0.3% vs. 0.2% consensus.
• In theory, if the Fed was truly objective, the Fed would wait and not cut interest rates in September due to hotter core inflation.
• The market consensus is a 50 bps cut in September.
• In The Arora Report analysis, based on the CPI data, at a minimum the Fed should not cut by 50 basis points in September and certainly no more than 25 basis points.  Having said that, we have seen it again and again, that the Fed decides what it wants to do first and then tries to justify it as opposed to letting the data shape the decision.  As we have written before, Powell is itching to cut rates. Here, the Fed has a ready excuse to cut rates by citing its double mandate – maximum employment and price stability.  Since the labor market is weakening, the Fed may decide to ignore the price stability part of its mandate and justify a rate cut based on labor.  
• In The Arora Report analysis, what the Fed does has major implications for the stock market, especially AI stocks.  
• Of note is that the yields on long bonds are rising after the release of CPI data.  Over the last couple of days, the momo crowd has aggressively been buying bond futures on leverage.  These highly leveraged positions are losing money this morning.  Unless bonds recover, there may be a negative impact on the stock market.
• In the early trade, the momo crowd is ignoring the data and aggressively buying the slight dip in AI stocks.  The buying in AI stocks is due to front running a speech by Nvidia's Jensen Huang.  The buying is especially aggressive in NVIDIA Corp NVDA.
• The yen rallied on comments from Bank of Japan (BOJ) official Junko Nakagawa.  As the yen rallies, there is more concern about the carry trade.  The most popular carry trade has been borrowing funds in Japan to invest in AI stocks in the U.S.
• In The Arora Report analysis, the rise in the yen may stop, and the yen may even weaken as investors digest the new CPI data.  
• Sentiment is very positive.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Apple Inc AAPL, Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOG, Meta Platforms Inc META, Microsoft Corp MSFT, and NVDA.

In the early trade, money flows are negative in Tesla Inc TSLA.

In the early trade, money flows are neutral in SPY and Invesco QQQ Trust Series 1 QQQ.

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust GLD.  The most popular ETF for silver is iShares Silver Trust SLV.  The most popular ETF for oil is United States Oil ETF USO.

Bitcoin

Bitcoin BTC/USD was sold after the presidential debate on Harris doing well.  Bitcoin bulls are hoping for a Trump win as Trump has closely aligned himself with bitcoin.  Large amounts of money from crypto whales appear to be flowing into Trump's campaign.

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 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 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.