Hot CPI Ahead Of Trump's Tariffs; Powell Not Coming To The Stock Market's Rescue

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

Hotter Inflation

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 was in the micro resistance zone prior to the release of inflation data.
• The chart shows that as of this writing after the release of the Consumer Price Index (CPI) data the stock market fell below the low band of the micro resistance zone.
• The chart shows that the stock market has made several attempts to break above the micro resistance zone over a period of time.  Prudent investors need to note that in spite of extreme bullishness and aggressive buying by the momo crowd, so far, the stock market has failed to break above the micro resistance zone.  This indicates that the momo crowd's aggressive buying is meeting selling from other investors.  
• CPI came hotter than expected.  Here are the details:
  • Headline CPI came at 0.5% vs. 0.3% consensus.
  • Core CPI came at 0.4% vs. 0.3% consensus.
• As a reader of The Arora Report, hotter inflation is not a surprise to you.  We have been sharing our analysis with you for a while that inflation is likely to be stickier than the Fed and stock market believe. The Arora Report call has kept you ahead of the curve.
• Today, Powell will continue his testimony before Congress.  Here are the key points from his testimony yesterday:
  • The Fed is not in a rush to make changes because the economy is "in a pretty good place."
  • If inflation does not improve and the economy is solid, the Fed will hold.
  • If inflation quickly declines or there is surprise weakness in the labor market, the Fed will cut interest rates.
  • The neutral rate has increased compared to pre-pandemic.
  • The reason longer term rates are high is "not particularly closely related to Fed policy." Investor concerns of inflation risks and rising budget deficits could keep longer term rates at higher levels.
• The stock market has gotten used to Powell coming to its rescue.  In The Arora Report analysis, this time, Powell is unlikely to come to the stock market's rescue.  Investors need to remember that in December 2018, Powell was doing the right thing by raising interest rates, and the stock market fell because the stock market was used to Powell coming to its rescue but that did not happen. Then, Powell cut interest rates; the stock market had a rip-roaring rally.  Could a repeat of 2018 – 2019 happen again? Trump is already on the record saying that interest rates should be lower.  This dynamic is taken into account in the protection band.  Please see the "Protection Band And What To Do Now" section below. 
• The consensus in the stock market is that Trump's tariffs will raise inflation.  Inflation is already higher than consensus.  Prudent investors should note that The Arora Report call is more nuanced.  The Arora Report call is that tariffs can be implemented in a way that, with the exception of a one time increase in inflation, can have a beneficial impact on the U.S. economy and stock market.  Of course, there is no way to know how Trump will implement tariffs.  This uncertainty is also taken into account in the protection band.  
• As we have been sharing with you, earnings are the single largest determinant of the stock market in the long term.  So far, there is a positive and a negative in earnings.  
  • On the positive side, earnings could rise to 12.5% vs. 7.3% expected prior to the start of earnings season.  This is significantly above the average of 5.5% since 2022.  
  • On the negative side, only 44% of S&P 500 companies beat operating margin estimates.  This is the lowest number since 2022. 
  • The positive and negative of earnings is also taken into account in the protection band.  
• Producer Price Index (PPI) and initial jobless claims will be released tomorrow at 8:30am ET.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Tesla Inc (TSLA).

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

In the early trade, money flows are negative in S&P 500 ETF (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 is seeing selling on CPI data.  The Arora Report call is bitcoin is not a hedge but a speculative asset.  Note that The Arora Report call is contrary to what bitcoin bulls want investors to believe.  

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.  The proprietary protection band from The Arora Report is very popular.  The protection band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.

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.