The Fed’s Powell Prevented a Stock Market Crash by Throwing Red Meat to the Bears
Dec 20, 2018 12:25 p.m. ET
Market Watch
The central bank chairman is administering regular doses of interest-rate increases, ultimately helping the stock market
Getty Images
Federal Reserve Chairman Jerome Powell
By NIGAM ARORA
ANALYST
Federal Reserve Chairman Jerome Powell is being universally criticized for what he had to say in the press conference after the release of the central bank’s policy statement. The stock market is giving Powell the thumbs down. But could he be smarter than the rest of the gurus? Let’s explore with the help of a chart.
Chart
Please click here for an annotated chart of S&P 500 ETF SPY, -1.63% Similar conclusions can be drawn from the charts of the Dow Jones Industrial Average DJIA, -1.99% Nasdaq 100 ETF QQQ, -1.45% and small-cap ETF IWM, -1.65% Please note the following from the chart:
• The market fell on the release of the Fed statement.
• The market was in the process of recovering going into the press conference.
• The market fell on what Powell said in the press conference.
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• The VUD indicator is the most sensitive measure of net supply/demand in real time. The VUD indicator shows that the selling was not as intense as it could have been.
• The VUD indicator also shows that at the end of the day there was net buying demand, even though the price did not recover.
• Not shown on the chart is an important factor: The dollar has been slightly weaker. If critics of Powell are right, the dollar should have been stronger.
• Looking at individual charts of popular stocks, the VUD indicator shows that selling was intense in stocks such as Apple AAPL, -2.52% Amazon AMZN, -2.29% Netflix NFLX, -2.32% and Nvidia NVDA, -2.46%
• The selling in popular stocks such as Facebook FB, +0.12% Micron Technology MU, -0.41% AMD AMD, -1.21% and Johnson & Johnson JNJ, +0.52% should be disregarded because that was primarily driven by individual company news.
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.
Powell’s message
Here is how Powell threw red meat to the bears.
• The market wanted no rate hike or, at most, one rate hike in 2019. Powell talked about two rate hikes in 2019.
• The market wanted some accommodation regarding the Fed’s massive balance sheet. Powell stayed firm on the current course of unwinding.
• The market wanted some empathy for the decline in the stock market. Powell showed none.
Stopping the ultimate crash
In 2007, when the stock market was doing great, house prices were going through the roof and many of the same gurus who are now criticizing Powell were in la la land, I called for investors to go into 100% protection mode. The call was to protect 100% of the portfolio with a combination of cash and hedges. In early 2008, my call was to accumulate inverse ETFs that go up when the market goes down and to also aggressively short-sell (for investors who could). In 2008, when most portfolios lost one-half of their value, The Arora Report turned in an impressive 45.9%.
In March of 2009, which with the benefit of hindsight turned out to be the bottom of the stock market, The Arora Report call was to aggressively buy stocks.
In the long term, very low interest rates and the Fed’s large balance sheet is simply not sustainable especially in view of rising national debt and slowing economic growth.
Isn’t it better to have small doses of medicine now when the economy is doing great and the stock market has done well over the last nine years compared to experiencing another crash?
I certainly do not like to see the market going down and investors losing money. However, the alternate is a market crash down the road.
What to do now
Our success at The Arora Report is in part due to the sophisticated adaptive ZYX Asset Allocation Model. In plain English, adaptive means the model changes itself with changing market conditions. Please click here to see how it is done. Static models suffer from the disadvantage that they may work under some market conditions but not under others. Adaptiveness is important now because the character of the market is changing, as I have been sharing with you since October.
At The Arora Report, we were holding a large amount of cash and hedges at the market top. Now we have taken profits on some of the hedges as the market has fallen and are beginning to deploy some of the cash in measured ways but still holding a fair amount of cash and some hedges.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.
Nigam Arora is an engineer, nuclear physicist, author, and entrepreneur and the founder of two Inc. 500 fastest growing companies. He is also the developer of the ZYX Change Method to profit from change by investing. The premise is that most money is made by predicting change before the crowd. Arora is the chief investment officer at The Arora Report and the editor of four newsletters that track the ZYX Change Method. Nigam can be reached at Nigam@TheAroraReport.com
Market Watch
The central bank chairman is administering regular doses of interest-rate increases, ultimately helping the stock market
Getty Images
Federal Reserve Chairman Jerome Powell
By NIGAM ARORA
ANALYST
Federal Reserve Chairman Jerome Powell is being universally criticized for what he had to say in the press conference after the release of the central bank’s policy statement. The stock market is giving Powell the thumbs down. But could he be smarter than the rest of the gurus? Let’s explore with the help of a chart.
Chart
Please click here for an annotated chart of S&P 500 ETF SPY, -1.63% Similar conclusions can be drawn from the charts of the Dow Jones Industrial Average DJIA, -1.99% Nasdaq 100 ETF QQQ, -1.45% and small-cap ETF IWM, -1.65% Please note the following from the chart:
• The market fell on the release of the Fed statement.
• The market was in the process of recovering going into the press conference.
• The market fell on what Powell said in the press conference.
Inside the Tunnel That Elon Musk Hopes Will Solve the ‘Goddamn Traffic Problem’
• The VUD indicator is the most sensitive measure of net supply/demand in real time. The VUD indicator shows that the selling was not as intense as it could have been.
• The VUD indicator also shows that at the end of the day there was net buying demand, even though the price did not recover.
• Not shown on the chart is an important factor: The dollar has been slightly weaker. If critics of Powell are right, the dollar should have been stronger.
• Looking at individual charts of popular stocks, the VUD indicator shows that selling was intense in stocks such as Apple AAPL, -2.52% Amazon AMZN, -2.29% Netflix NFLX, -2.32% and Nvidia NVDA, -2.46%
• The selling in popular stocks such as Facebook FB, +0.12% Micron Technology MU, -0.41% AMD AMD, -1.21% and Johnson & Johnson JNJ, +0.52% should be disregarded because that was primarily driven by individual company news.
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.
Powell’s message
Here is how Powell threw red meat to the bears.
• The market wanted no rate hike or, at most, one rate hike in 2019. Powell talked about two rate hikes in 2019.
• The market wanted some accommodation regarding the Fed’s massive balance sheet. Powell stayed firm on the current course of unwinding.
• The market wanted some empathy for the decline in the stock market. Powell showed none.
Stopping the ultimate crash
In 2007, when the stock market was doing great, house prices were going through the roof and many of the same gurus who are now criticizing Powell were in la la land, I called for investors to go into 100% protection mode. The call was to protect 100% of the portfolio with a combination of cash and hedges. In early 2008, my call was to accumulate inverse ETFs that go up when the market goes down and to also aggressively short-sell (for investors who could). In 2008, when most portfolios lost one-half of their value, The Arora Report turned in an impressive 45.9%.
In March of 2009, which with the benefit of hindsight turned out to be the bottom of the stock market, The Arora Report call was to aggressively buy stocks.
In the long term, very low interest rates and the Fed’s large balance sheet is simply not sustainable especially in view of rising national debt and slowing economic growth.
Isn’t it better to have small doses of medicine now when the economy is doing great and the stock market has done well over the last nine years compared to experiencing another crash?
I certainly do not like to see the market going down and investors losing money. However, the alternate is a market crash down the road.
What to do now
Our success at The Arora Report is in part due to the sophisticated adaptive ZYX Asset Allocation Model. In plain English, adaptive means the model changes itself with changing market conditions. Please click here to see how it is done. Static models suffer from the disadvantage that they may work under some market conditions but not under others. Adaptiveness is important now because the character of the market is changing, as I have been sharing with you since October.
At The Arora Report, we were holding a large amount of cash and hedges at the market top. Now we have taken profits on some of the hedges as the market has fallen and are beginning to deploy some of the cash in measured ways but still holding a fair amount of cash and some hedges.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.
Nigam Arora is an engineer, nuclear physicist, author, and entrepreneur and the founder of two Inc. 500 fastest growing companies. He is also the developer of the ZYX Change Method to profit from change by investing. The premise is that most money is made by predicting change before the crowd. Arora is the chief investment officer at The Arora Report and the editor of four newsletters that track the ZYX Change Method. Nigam can be reached at Nigam@TheAroraReport.com
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