AI HYPE MEETING REALITY, FED UNDER POLITICAL PRESSURE TO CUT RATES QUICKLY

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By Nigam Arora & Dr. Natasha Arora

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

AI Hype Meets Reality

Please click here for a chart of Microsoft stock (MSFT) compared to AMD stock (AMD) and Alphabet stock (GOOG).

Note the following:

  • The chart shows when earnings were released from MSFT, AMD, and GOOG.
  • The chart shows the drop in all three stocks on earnings.
  • The Arora Report shared with you in advance yesterday:

Whisper numbers for Microsoft earnings are significantly higher than the consensus numbers.  Stocks move based on the difference between whisper numbers and actual numbers.  Whisper numbers are the numbers that analysts share privately with their best clients and are often different from the numbers the same analysts publish.

  • In The Arora Report analysis, earnings from MSFT, AMD, and GOOG were good but did not meet the whisper numbers.
  • In The Arora Report analysis, earnings from MSFT, AMD, and GOOG show that prospects for AI are excellent but less than the hype. Prudent investors need to remember that Wall Street is a great hype machine.   
  • This morning in the early trade, tech stocks were seeing significant selling and then came the ADP employment change report.
    • ADP is the largest payroll processor in the country.  ADP uses its data to give an advanced glimpse of the jobs picture ahead of the official jobs report that will be released on Friday at 8:30am ET.
    • ADP employment change came at 107K vs. 140K consensus.
    • Weakness in the ADP report brought aggressive buying into stocks.  The reason is that if employment weakens, the Fed is more likely to cut interest rates.
  • The Fed rate decision will be announced at 2pm ET followed by Powell’s press conference at 2:30pm ET.
  • As a reminder, The Arora Report is the only credible resource for investors that is politically agnostic.  As the election approaches and emotions are running hot, most analysts have an agenda to favor Democrats or Republicans based on their own affiliation.  This gets in the way of providing sound investment guidance.  At The Arora Report, our sole job is to help investors without a political agenda.
  • In The Arora Report analysis, the Fed is coming under political pressure to cut rates quickly even though the data does not justify such a move.  
    • Democrats want the Fed to cut rates quickly to help Biden.  
    • Republicans want the Fed to cut rates now as they believe that if the Fed is cutting rates too close to the election, it will help Biden.  
  • At The Arora Report, we will be analyzing the Fed’s statement and listening to Powell’s press conference for clues on when the first rate cut will occur.
  • As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.   Please scroll down to see the protection band.
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Magnificent Seven Money Flows

In the early trade, money flows are negative in Apple (AAPL), Amazon (AMZN), Alphabet (GOOG), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA).

In the early trade, money flows are mixed in S&P 500 ETF (SPY) and negative in 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.

Gold

Historically, the momo crowd almost always buys gold ahead of Fed announcements.  Today is no different. 

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 crude inventories came at a draw of 2.5M barrels vs. a consensus of a draw of 0.867M barrels.  This data is bullish.  

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) was seeing selling earlier in the morning and yesterday evening in sympathy with selling in tech stocks.  As buying came in tech stocks on ADP data, buying is coming in bitcoin.

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 down, and bonds are ticking up.

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The dollar is weaker.

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 $2059, silver futures are at $23.25, and oil futures are at $77.23.

S&P 500 futures are trading at 4923 as of this writing.  S&P 500 futures resistance levels are 5020, 5210, and 5400: support levels are 4918, 4852, and 4826.

DJIA futures are up 80 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.

See also  AI STOCKS SHOW ASYMMETRY ON EXPECTATIONS PROVING TOO HIGH, WALL STREET PREPS FOR PRESIDENTIAL DEBATE

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 seven 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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Picture of Nigam Arora

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.

Picture of Dr. Natasha Arora

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.

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