The stock market decline more than a week ago was kicked off by higher-than-expected wage increases that showed up in the January jobs report.
Higher wages are raising the specter of inflation. As a result, interest rates have risen rapidly as investors and traders anticipate that the era of benign inflation may be coming to an end.
Does it make sense to wait until the next inflation-related data point is released before making big buy or sell decisions in the markets? If yes, please read on.
The Morning Capsule that is made available to the subscribers to The Arora Report every day before the market open said: “From a fundamental perspective, the reason for the downdraft is the specter of inflation. On Wednesday morning at 8:30 a.m. ET, the Consumer Price Index (CPI) will be released. The smart money appears to be waiting for this data before acting.”
So the all-important inflation report coincides with Valentine’s Day this year. May both events be favorable to investors ...
Let’s examine inflation using a chart.
Read: How to know when U.S. stocks will bottom, according to eight investing pros
Chart
Please click here to see the chart of the Consumer Price Index (CPI) excluding food and energy prices. Please note the following from the chart:
• The specter of deflation is over.
• CPI ex-food and energy can vary quite a bit from month to month.
• The Federal Reserve has been targeting 2% inflation. The data so far are not out of line.
Also on inflation: Expectations for inflation drop in January, according to Fed survey
The consensus is for CPI to come in at 0.4%. Expect machine-driven investing strategies to buy stocks if that number is lower and sell if the number is higher. However, most investors should not react to what machines may do when the news hits.
At The Arora Report we look at CPI ex-food and energy; our estimate is 0.2%. Yes, we all consume food and energy. The reason for excluding food and energy is that food and energy are volatile. The volatility makes it impossible to use the data for any kind of prediction. To see the 10 categories of inputs that go into The Arora Report timing model, please click here. The ZYX Global Allocation Model is adaptive, i.e., it changes automatically with market conditions.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
Smart money and ‘momo’ actions
On Friday, when the market was down 700 points, the “momo” (momentum) crowd was aggressively selling but the “smart money” (professionals) was buying into the weakness. This morning the momo crowd is aggressively buying. The smart money is inactive.
On the dip, the smart money was lightly buying Facebook FB, +0.17% Alibaba BABA, +0.44% Twitter TWTR, -1.78% Snap SNAP, -0.90% Bank of America BAC, +2.60% and Citigroup C, +1.47%
The momo crowd is getting whipsawed and mostly focused on Amazon AMZN, +3.48% Apple AAPL, +4.03% Nvidia NVDA, -1.75% Micron MU, +4.40% and AMD AMD, +3.27%
Among ETFs, the smart money seems to be focusing on S&P 500 ETF SPY, +1.47% Bank ETF KBE, +0.87% regional bank ETF KRE, +0.80% and emerging markets ETF EEM, +1.57%
The momo crowd seems to be focused on the Nasdaq 100 ETF QQQ, +1.77% semiconductor ETF SMH, +2.12% and biotech ETFs XBI, +2.03% and IBB, +1.59%
What to do now
The message here is to wait until the CPI data are known. At The Arora Report, we will be digging into the various components that form the inflation index. Furthermore, we will be depending on our algorithms to see how the smart money reacts to the data.
In the meantime, during this period of volatility, investors will find the following articles helpful:
• Stock market patterns suggest bullishness will triumph over bearishness
• Here’s how to understand — and prosper from — the stock market’s wild moves
• This is the big blunder that many average investors are committing now
• No FOMO? Don’t make this other classic stock-market investment mistake
• Concerned about the stock market? Here are the ‘smart money’ signals on 10 popular companies
• Making America great again by destroying the dollar is bad for the average U.S. investor
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.