By Nigam Arora
To gain an edge, this is what you need to know today.
Semiconductor Rally
Please click here for a chart of leverage semiconductor ETF (SOXL).
Note the following:
- Semiconductors are the leading sector that drove the stock market higher. SOXL is the momo crowd’s favorite semiconductor ETF.
- The chart shows a massive rally in semiconductors yesterday. In yesterday’s Morning Capsule, we wrote:
The chart shows selling in SOXL yesterday was on heavy volume. The reason for the heavy volume was that many momo crowd accounts were hit with margin calls and were forcibly liquidated.
- The heavy volume shown on the chart the day before yesterday resulted in exhaustion of selling. The massive rally yesterday shown on the chart was the result of the overhang of forced liquidations of momo crowd accounts lifted. As a member of The Arora Report, you were already ahead of the curve. Yesterday morning before the market open, we wrote:
RSI on the chart shows SOXL is moving out of the oversold zone. This sets SOXL up for a potential bounce unless there are more margin calls and more momo accounts are liquidated.
- The last time a similar rally was seen was in 2001 after the internet bubble crashed. Here is the key question for investors: Will this semiconductor rally be sustained or peter out? The answer will come down to if momo accounts that have been on the verge of liquidation have already been liquidated or if more liquidations are still ahead. In The Arora Report analysis, the big rally, at a minimum, has postponed more liquidations.
- The chart shows that there is more aggressive buying in semiconductors this morning.
- A high profile hedge fund in which all publicly traded securities were sold to Citadel, essentially a liquidation, was ironically named Situational Awareness – the fund does not appear to have awareness of the risk it was taking by buying momentum AI stocks on 4:1 leverage. The fund was run by 25 year old Leopold Aschenbrenner who had amassed $45B of assets. When the momentum turned, Situational Awareness lost 67% in July. Aschenbrenner had no prior professional investing experience before starting the fund two years ago. He was a quintessential momo crowd guru.
- In addition to the U.S., a large number of momo accounts were forcibly liquidated in South Korea. To deal with the stock market drop, the South Korean government announced a variety of measures including their sovereign wealth fund injecting $13.9B in AI. As the overhang of forced liquidations lifted, the Kopsi index in South Korea ran up 18% for the day. Samsung Electronics (SSNLF) was up 27% for the day and SK Hynix (SKHY) jumped 30%. It was the biggest one day jump in SK Hynix stock since the company went public in the 1990’s.
- Amazon stock (AMZN) jumped after earnings. Many less knowledgeable retail investors did not realize that the reported income included investment gains and acted on the headline. Many Wall Street algos also appear to have acted on the headline. Here are the details:
- Amazon reported EPS of $5.75 vs. $1.82 consensus.
- Amazon reported revenue of $200.6B vs. $196.43B consensus.
- AWS sales were $42.23B vs. $30.87B last year. This was the fastest growth for AWS in 18 quarters. AWS is the computing arm of Amazon.
- Amazon will spend $220B on capex.
- The stock market got excited about Amazon when Amazon said that AWS could become a $1T business. This $1T forecast brought more buying into semiconductors after hours.
- Apple stock (AAPL) had run up going into earnings for two reasons:
- Whisper numbers continued to move up.
- The narrative changed from Apple being a laggard in AI to a good thing that Apple was not spending capex on AI.
- Apple earnings disappointed. Here are the details:
- Apple reported earnings of $2.02 vs. $1.89 consensus. Whisper numbers were over $2.10.
- Apple reported revenue of $109.4B vs. $108.96B consensus. Whisper numbers were over $111B.
- For Q4 Apple sees revenue of $111.7B – $113.7B vs. $114.95B consensus.
- The issue with Apple is it is facing supply constraints. Apple’s supply constraints brought in more buying in semiconductors after hours.
- Investors need to be discerning as AI can be a double edge sword. Reddit (RDDT) is a perfect example. RDDT reported earnings better than consensus and whisper numbers, but the stock is down about 15% as of this writing in the premarket. Reddit is benefiting from payments from Google (GOOG, GOOGL) for using Reddit data to train its AI. On the other hand, AI is answering people’s questions. As such, people do not need to go to Reddit to get answers. Reddit is seeing a sequential decline in daily average users.
- There have been rumors that Tesla (TSLA) is looking at separating its China business to prepare for a Tesla merger with SpaceX (SPCX). Elon Musk is denying the rumors.
- Today is a Friday. Short sellers will be covering to reduce risk ahead of the weekend, and longs will be selling to reduce risk from adverse developments in the Middle East over the weekend. As a result of these two crosscurrents, whichever way the stock market starts going, Wall Street machines will jump in the same direction, exaggerating the move.
- The yield on U.S. Treasuries is stubbornly staying elevated, currently at 5.228% as of this writing, on concerns that the Fed, under new Chair Warsh, has fallen behind the curve.
- University of Michigan Consumer sentiment will be released at 10am ET and may be market moving.
- As an actionable item, the sum total of the foregoing is in the Arora Protection Band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the Arora Protection Band. The Arora Protection Band is one of the large number of unique edges that are available to members of The Arora Report.
Japan
Japan, the U.S., and South Korea intervened in forex markets to support the yen. To cement the gains in the yen, the Bank of Japan (BOJ) needed to raise interest rates, but BOJ decided to leave its policy rate unchanged at 1%. Prudent investors pay attention to Japan because of the carry trade. In the carry trade, funds have borrowed hundreds of billions of dollars in Japan to invest in the U.S. primarily in the AI trade.
Magnificent Seven Money Flows
Most portfolios are now heavily concentrated in the Mag 7 stocks. For this reason, to get ahead and get an edge, investors need to dig below the surface of the Mag 7 stocks. It is equally important to rise above the noise of daily news on the Mag 7 stocks. The best way to get an edge, dig below the surface, and rise above the noise of the daily news is to pay attention to early money flows in the Mag 7 stocks on a daily basis. When there is significant news in the Mag 7 stocks that rises above the threshold of noise and impacts your entire portfolio, it is covered in the main section above.
In the early trade, money flows are positive in Amazon (AMZN), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG), Meta (META), and Tesla (TSLA).
In the early trade, money flows are negative in Apple (AAPL).
In the early trade, money flows are positive in S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ).
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.
Note for new members: Smart money often sells into the strength generated by momo crowd buying and buys into the weakness generated by momo crowd selling. Over a long period of time, investors come out ahead by adopting smart money’s ways. The exception is in a raging bull market – for very short term trades, consider following the momo crowd and not smart money. Smart money is an important indicator but is only one of hundreds of indicators that go into determining the Arora Protection Band and signals. Please click here and here to understand how signals are generated.
Very Very Short-Term Indicator
The Arora Report’s proprietary 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.
Gold
The momo crowd is *** gold in the early trade. This is reflected in gold ETF (GLD), silver ETF (SLV), gold miner ETF (GDX), and silver miner ETF (SIL). 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 (BTC.USD) is range bound.
Markets
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.
S&P 500 futures are trading at 7486 as of this writing. S&P 500 futures resistance levels are 7700, 7900, and 8000 : support levels are 7318, 7194, and 7032.
DJIA futures are up 188 points.
Gold futures are at $4071, silver futures are at $57.97, and oil futures are at $85.46.
Arora Protection Band And What To Do Now
It is important for investors to look ahead and not in the rearview mirror. The proprietary Arora Protection Band from The Arora Report is very popular. The Arora 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 holding *** in cash, Treasury bills, short term fixed income, 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.
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.
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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.
