By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Glimmers Of Hope
Please click here for a chart of Micron stock (MU).
Note the following:
- The Morning Capsule is about the big picture and not individual stocks. The chart of Micron stock is being used to illustrate the bigger point.
- We have often shared with you that semiconductors are a leading sector. Semiconductors often move before the rest of the stock market. Within semiconductors, Micron is a bellwether as it is the largest semiconductor memory manufacturer in the country.
- During the pandemic, when the momo crowd was running up semiconductor stocks without understanding how the industry worked, we provided you with an edge by repeatedly sharing with you that a common practice in the industry was double and triple ordering. Please see prior Capsules for the details.
- The chart shows that Micron made a higher low.
- The chart shows the reaction to Micron earnings.
- On the surface, Micron earnings were terrible.
- Earnings came at a loss of $1.91 vs. consensus of a loss of $0.86.
- Micron is writing off $1.43B of inventory (remember double and triple ordering) vs. a consensus of a write off of $700M.
- Micron had a negative gross margin due to inventory write off.
- For Q3, Micron is projecting a loss of $1.51 – $1.65 vs. consensus of a loss of $0.90.
- In spite of such terrible earnings, there is a glimmer of hope in Micron’s earnings. It appears that the inventory write-down cycle is bottoming. Historically, the time to buy semiconductors is when the inventory cycle bottoms.
- There is also excitement about artificial intelligence as artificial intelligence is likely to use ten times more memory.
- The stock market also likes that Micron is reducing headcount by about 15% and cutting production.
- Adding to the excitement from Micron’s earnings, there is a strong rally in China tech. The rally in China tech was triggered by a 16% move in Alibaba (BABA) on the news that it would split into six units.
- The Chinese government is apparently embarking on a plan to attract more foreign investment.
- On the strong rally in Chinese tech stocks, overnight stocks in Hong Kong rose 2.1%.
- The sentiment from China seeped into Japan where stocks closed up 1.3%.
- In a round robin fashion, European stocks rallied in part, encouraged by the rally in Asia.
- The rally in Europe is also encouraged by two pieces of news:
- Chip maker Infineon (IFNNY) raised its guidance.
- UBS is rehiring its former CEO.
- The futures in the U.S. are taking their cue from China and Europe on top of excitement about Micron.
- There is aggressive buying in the premarket.
- Aggressive buying in the premarket has pushed S&P 500 futures above the psychologically important number of 4000.
- The Fed’s favorite inflation gauge PCE will be released on Friday. Expect the momo crowd to buy ahead of PCE on hope strategy. There may be a need to reduce hedges. Stay tuned.
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
API data is positive for oil. API came at a draw of 6.076M barrels vs. a consensus of a build of 0.187M barrels.
The momo crowd is 🔒 oil in the early trade. Smart money is 🔒 in the early trade.
For longer-term, please see oil ratings.
Bitcoin
There are reports that Binance has extensive links with China even though Binance has been claiming that it left China in 2017. Whales are aggressively driving bitcoin higher to prevent bitcoin from falling after the U.S. lawsuit against Binance.
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 1964, silver futures are at $23.31, and oil futures are at $74.14.
S&P 500 futures are trading at 4038 as of this writing. S&P 500 futures resistance levels are 4200, 4318, and 4400: support levels are 3950, 3860, and 3770.
DJIA futures are up 256 points.
Protection Bands 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.
