Producer Inflation Craters, A Government Shutdown Will Be A Buying Opportunity

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

Producer Inflation Craters

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:

• This morning there are significant crosscurrents in both the positive and negative direction.
• The chart shows the stock market briefly dropped below the low band of support zone 1 before bouncing.
• RSI on the chart shows that after briefly moving out of the oversold zone, RSI reentered the oversold zone.
• In an unexpected development, producer inflation cratered in February.  Here are the details:
  • Headline PPI came at 0.0% vs. 0.3% consensus.
  • Core PPI came at -0.1% vs. 0.3% consensus.
• Jobless claims show that the labor market is staying strong.  This is a leading indicator and carries heavy weight in The Arora Report ZYX Asset Allocation Model.  Initial jobless claims came at 220K vs. 228K consensus.
• The Bank of Canada cut interest rates by 25 bps.  It is important for prudent investors to understand the reasoning behind the interest rate cut in Canada as the Fed may ultimately follow the same logic.  In our analysis, the real reason the Bank of Canada is cutting interest rates at this time is to counter the impact of tariffs.  Here is the pertinent section of the statement from the Bank of Canada: "The Canadian economy entered 2025 in a solid position, with inflation close to the 2% target and robust GDP growth. However, heightened trade tensions and tariffs imposed by the United States will likely slow the pace of economic activity and increase inflationary pressures in Canada. The economic outlook continues to be subject to more-than-usual uncertainty because of the rapidly evolving policy landscape."
• President Trump is threatening 200% retaliatory tariffs on European wines.  Europe has 50% tariffs on whiskey.  This is bringing in selling in the stock market.
• It is very important to remember to separate your politics from investing.  We have seen both Democrats and Republicans miss out on large gains because they thought the stock market would crash on the new president's watch.  For example, many Democrats stayed out of the market during Trump's first term because they thought the stock market would crash.  To the contrary, during Trump's first term, the S&P 500 increased about 68%.  Similarly, many Republicans stayed out of the market during Biden's term thinking the stock market would crash.  Again, to the contrary, the S&P 500 rose about 58%.
• The House passed the Republican spending bill.  Now, it is up to the Senate Republicans and Democrats to come to terms to prevent a government shutdown.  Neither party wants a shutdown.  However, Democrats see negotiations on spending at this time as their best opportunity to push back against Trump's agenda.
• In our analysis, based on history, if the stock market drops on a government shutdown, it has historically always been a buying opportunity.  Having said that, there are many other factors at play. Investors should make decisions based on a 360 degree analysis such as from the adaptive ZYX Asset Allocation Model with inputs in ten categories.
• Prudent investors should note that longer term interest rates are rising instead of falling on cooler inflation.  The normal pattern would have been for interest rates to fall.  This abnormal pattern is a negative.  If this trend persists, it has the potential to kill the budding stock market rally.
• Yesterday's budding rally gave back a big part of initial gains on rising bond yields.  The probability of a rate cut by May is only one half of what it was before the release of better than expected Consumer Price Index (CPI).  Based on better than expected CPI, the probability of a rate cut should have gone up, not down.  In our analysis, there are two reasons that the probability of a rate cut has gone down on better inflation data:
  • The prospect of stagflation
  • The impact of tariffs

Magnificent Seven Money Flows

In the early trade, money flows are positive in NVIDIA Corp (NVDA).

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 Tesla Inc (TSLA)

In the early trade, money flows are like a yoyo 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 range bound.

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.