By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
AI Driven Leading Sector
Please click here for a chart of semiconductor ETF SMH.
Note the following:
- The chart shows that year to date SMH is up 45%.
- The chart shows that semiconductors took another leg up after Nvidia’s (NVDA) blowout earnings due to demand for Nvidia GPUs driven by ChatGPT.
- The chart shows that volume was high when semiconductors took this leg up. This indicates conviction.
- Semiconductors have become the blood of the new economy. In the first stage of the AI infrastructure build up, semiconductors are the early beneficiaries.
- With the exception of the last few years, semiconductor stocks used to be cyclical stocks and they often slumped in the summer. Prudent investors typically bought them during the summer slump. The last few years have been unusual. This year there is an additional buying frenzy because of AI. Having said that, if there is a slump this summer in semiconductor stocks, that will be a buying opportunity.
- Here is the key question for investors: Will semiconductor stocks along with other AI stocks continue to drive the stock market or will they pull back? The probability is high that if semiconductor stocks pull back, the entire market will pull back.
- The Core Model Portfolio in ZYX Allocation has up to 12% allocation to semiconductor ETF SMH. In addition, there are semiconductors in other ETFs in the portfolio. Together, semiconductors are about 15% of the ZYX Allocation Core Model Portfolio. This is the highest weight of any one sector in the ZYX Allocation Core Model Portfolio. Our rules limit the maximum allocation in one sector to 20%. The plan is to increase semiconductor allocation in due course.
- In ZYX Buy Model Portfolio, there are four semiconductor stocks: AMAT, NVDA, NXPI, and QCOM. There are additional semiconductor stocks in ZYX Buy in the portfolio that surrounds the Model Portfolio. The plan is to add additional semiconductor stocks and increase the position size in due course.
- The foregoing illustrates the merit of how Corporate Bundle 1 is structured. The data shows that over the last 15 years, investors who allocate their money in accordance with the “Accelerating Wealth Generation” section of the Trade Management Guidelines have done the best.
- This week, money is flowing into laggards, i.e. non-AI stocks. The move to laggards makes a lot of sense if there is going to be no landing or a soft landing. On the other hand, buying the laggards at this time will not be a smart move if there is a recession.
- You need to be aware that historically, the stock market is enthusiastic, assuming that there would not be a recession or that the recession would be shallow well ahead of the recession. In all recessions, since World War II, with the exception of 2002. Such an assumption on the part of the market was proven wrong. Typically, investors who bought laggards before the recession incurred major losses during the recession and ended up selling the laggards near the lows.
- We will be carefully watching money flows into laggards. If money flows continue in the laggards, there may be signals to take tactical positions in some laggards with the intention of taking profits before a recession.
Momo Crowd And Smart Money In Stocks
The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) stocks in the early trade. Smart money is 🔒 in the early trade.
Gold
The momo crowd is 🔒 gold in the early trade. Smart money is 🔒 in the early trade.
For longer-term, please see gold and silver ratings.
Oil
The momo crowd is 🔒 oil in the early trade. Smart money is 🔒 in the early trade.
For longer-term, please see oil ratings.
Bitcoin
Bitcoin is range bound.
Markets
Our very, very short-term early stock market indicator is 🔒. This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.
Interest rates are ticking up, and bonds are ticking down.
The dollar is stronger.
Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.
Gold futures are at $1980, silver futures are at $24.43, and oil futures are at $71.45.
S&P 500 futures are trading at 4297 as of this writing. S&P 500 futures resistance levels are 4318, 4400, and 4460: support levels are 4200, 4000, and 3950.
DJIA futures are down 75 points.
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 holding 🔒 in cash or treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. 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.
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.
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Nigam Arora
Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.
Dr. Natasha Arora
Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.
