WEEKLY STOCK MARKET DIGEST: AI FRENZY DRIVING THE STOCK MARKET TRUMPING ALL THE OTHER NEGATIVE DATA

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By Nigam Arora & Dr. Natasha Arora

Weekly Digest from The Arora Report is popular among serious investors and money managers because they have found studying insights from the prior week gives them an edge over the coming weeks. Here is the day by day rundown from the morning capsules made available every morning before the market open in the Real Time Feeds to the paying subscribers of The Arora Report

Please scroll down for the section ‘Protection Bands and What To Do Now.’

 

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

Better Than Perfection

Please click here for a chart of Nvidia stock (NVDA).

Note the following:

  • The Morning Capsule is about the big picture, not an individual stock.  The chart of Nvidia stock is being used to illustrate the point.
  • The chart shows a 29% jump in Nvidia stock after hours.
  • The after hours jump in Nvidia stock equates to a $218B jump in market cap.  This is the biggest market cap jump after hours in a semiconductor company in our over 30 years in the markets.  To understand how big of a jump in market cap this is, the entire market cap of Intel (INTC) is $120B.  Not long ago, Intel was the biggest semiconductor manufacturer in the world.
  • Going into earnings, Nvidia stock was primed for perfection.
  • Nvidia reported earnings not only better than perfection but significantly better than perfection.  In our over 30 years in the markets, we have never seen such a big earnings beat by a stock that was already primed for perfection.
  • There are many numbers from Nvidia’s earnings forecast and the conference call.  Here are the mindblowing key points:
    • In the current quarter, Nvidia is projecting sales of $11B vs. $7.18B consensus.
    • Even with this kind of jump in sales, Nvidia is undershipping the demand.
    • In addition, in spite of the big sales jump, Nvidia is projecting gross margins of about 70%.
    • Nvidia is projecting $1T will be spent on upgrading data centers to accommodate ChatGPT and similar generative AI tools.
    • We have been receiving a large number of emails from investors and money managers taking an issue with our bullish calls on AI.  Such investors and money managers are claiming that AI is in a bubble.  Our call has been that it is not a bubble, it is just a frenzy.  The foregoing data from Nvidia earnings is proof positive that our call is right.  Nvidia earnings shows that the AI gold rush is bigger than anybody thought until 4pm ET yesterday.  It is important for investors to not get locked in an opinion but be open to new data as it comes.  
  • A fortune is to be made in AI over the next seven years.  However, it is not going to be a straight line.  There are going to be many pitfalls.  Investing in AI is going to be treacherous.  As a historical reference, it is worth remembering that at one time Amazon (AMZN) stock lost about 95% of its value.  From our long experience with thousands of investors and money managers, we know that investors who take time to develop deeper knowledge do significantly better than investors who do not.  The easiest way to develop your AI knowledge is with a membership to Arora Ambassador Club.  Unfortunately, the opportunity to join Arora Ambassador Club is now closed.
  • As an important caution, this Morning Capsule is not a call to buy Nvidia stock right here by those who are not holding Nvidia.  As a full disclosure, after hours yesterday, The Arora Report gave a signal to take partial profits on a small quantity, such as 5% of the full core position size, to take advantage of the strength.  Consider having investing discipline and sticking to the ZYX Change Method along with ZYX Asset Allocation Model that have generated enviable returns in both bull and bear markets.
  • Many investors on social media are sadly mistaken about what happened yesterday after hours.  They are pointing to a very expensive evaluation of a trailing PE of 164, a forward PE of 63, and price/sales of 26.  Yesterday’s earnings changed it all.  If the present trend continues, in The Arora Report analysis, Nvidia will likely earn $10 – $12 in 2024.  Using $11 as the mid-point and even after a 29% stock jump after hours, this translates to forward PE of 36.  For a stock that performs significantly better than perfection, a forward PE of 36 is reasonable.  As a matter of fact, The Arora Report is raising its target on Nvidia to $565 – $615, compared to the closing price of $305.38.  Nvidia is in the ZXY Buy Model Portfolio.
  • Nvidia is a large stock now with about 6% weight in QQQ.

Negative Watch

Credit rating agency Fitch has put the U.S. debt rating on a negative watch.  Fitch expects a deal on the debt ceiling but the negative watch is due to the high risk given the fast approaching X-date.  Right now, the stock market is ignoring it due to the AI frenzy.  In 2011, the stock market experienced a major drop after the U.S. credit rating was put on a negative watch.

As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

GDP

GDP second estimate came at 4.2% vs. 4.0% consensus. This indicates that the economy has been stronger than previously thought.  Those who want to learn more about GDP and estimates should listen to the podcast titled “Recession: What You Need To Know To Gain An Edge.”

Jobless Claims

Initial jobless claims came at 229K vs. 247K consensus.  This is a leading indicator and carries heavy weight in the adaptive ZYX Asset Allocation model with inputs in ten categories.  Adaptiveness means that the model automatically changes with market conditions.  Please click here to see how adaptiveness is achieved.

Germany

Germany officially entered a recession on Q1 GDP being revised to -0.3% vs. -0.1% consensus.  

Honoring Our Brave On Memorial Day

Memorial Day holiday is upon us.  Please join us in remembering the brave who sacrificed their lives for us to enjoy the freedoms we have.

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Due to the holiday schedule, there will be no Afternoon Capsule today, and the offices will be on a reduced schedule Friday.  Posts other than the capsules will be published as needed.  Capsules will resume on Tuesday.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) tech 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 $1941, silver futures are at $22.91, and oil futures are at $73.36.

S&P 500 futures are trading at 4161  as of this writing.  S&P 500 futures resistance levels are 4200, 4318, and 4400: support levels are 4000, 3950, and 3860.

DJIA futures are down 36 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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XBB Wave

Please click here for a chart of Nvidia stocks (NVDA).

Note the following:

  • The Morning Capsule is about the big picture, not an individual stock.  The chart of Nvidia stock is being used to illustrate the point.
  • Nvidia is the quintessential stock representing artificial intelligence stock buying frenzy.
  • Nvidia has almost all of the share of the GPU market for training large language models.  ChatGPT was trained on 10,000 Nvidia GPUs.  For those desiring next-level information, listen to the podcast titled “Risks To Nvidia Artificial Intelligence Chips – Applied Materials Is The Solution.” The podcast is available in Arora Ambassador Club.
  • The trendline on the chart shows a very large move in a short time in Nvidia stock.
  • The chart shows acceleration from the trendline in May as enthusiasm for artificial intelligence got super heated.
  • RSI on the chart shows the divergence.  In plain English, this means that as the price continues to go higher, RSI made a lower peak.  This indicates that the internal momentum of the upmove has been waning.
  • We previously shared with you:

Nvidia (NVDA) stock is the leader of the artificial intelligence stock market rally.  Nvidia earnings are Wednesday after the close.  Nvidia earnings have the potential to change the course of the AI frenzy driven stock market rally.

  • From yesterday’s Afternoon Capsule:
  • The chart shows when smart money started selling artificial intelligence (AI) stocks.

  • Smart money selling AI stocks is consistent with smart money’s pattern.   We have been sharing smart money’s pattern with you for years. Smart money reduces risk ahead of major events.  In contrast, the momo crowd uses hope strategy and buys ahead of major events, thinking only of the rewards and not the risks.

  • Nvidia earnings represent a risk to the non-stop AI stock buying frenzy.

  • It is important for investors to note that it is not that smart money is not a believer in AI.  They are simply slightly lightening up ahead of the risk event.  This is the same message that we sent to Arora Ambassador Club members in the latest podcast “Don’t Be Fooled: AI Frenzy Driving Unhealthy Stock Market.”

  • The enthusiasm for artificial intelligence is up against several negative data points as outlined below:
    • XBB is a highly immune evasive group of COVID variants.  These variants are expected to sweep through China.  Previously, China has not seen a wave of XBB variants.  For this reason, the Chinese population is at risk of severe outcomes.  Do not expect a lot of news because testing is minimal.  How the virus affects the rest of the world is yet to be seen.
    • Luxury stocks such as LVMH are selling off on prospects of XBB in China and slowing growth in the U.S.  Luxury stocks have been the star performers in Europe.  This morning, European stock markets are selling off due to a drop in luxury stocks.
    • As the debt ceiling deadline approaches, unease is beginning to creep up in the stock market especially among those money managers who were around in 2011 and lived through the stock market drop.
  • FOMC minutes will be released at 2pm ET.  The expectation is for the minutes to be hawkish.
  • The momo crowd is ignoring the virus development, but prudent investors need to be highly aware.
  • As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.
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Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 stocks in the early trade.  Smart money is 🔒 stocks 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 crude inventories came at a draw of 6.799M barrels vs. a consensus of a build of 0.525M 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

Bitcoin has fallen below $27,000.

Markets

Our very, very short-term early stock market indicator is 🔒 but can easily turn based on news regarding the debt ceiling, XBB, FOMC minutes, and Nvidia rumors.  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.

The dollar is range bound.

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 $1981, silver futures are at $23.55, and oil futures are at $74.18.

S&P 500 futures are trading at 4139 as of this writing.  S&P 500 futures resistance levels are 4200, 4318, and 4400: support levels are 4000, 3950, and 3860.

DJIA futures are down 109 points.

 

HEDGE FUNDS INCREASING SHORT POSITIONS IN THE STOCK MARKET AS THEY BELIEVE AI RALLY IS OVERDONE

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

AI Frenzy

Please click here for a chart of S&P 500 ETF (SPY) which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

  • The chart shows that the stock market has had difficulty rocketing through the resistance shown in red to the next resistance zone.
  • The momo guru narrative is that the stock market has been constrained due to the debt ceiling issue and the stock market will rally significantly on the news of an agreement on the debt ceiling.
  • In contrast to momo gurus, the narrative of stock market bears is that a debt ceiling resolution will be a ‘sell the news’ event.
  • The body language of both sides is optimistic on a debt ceiling resolution.
  • Politically, both sides have no option but to do the dance of their hard lines until the last moment to satisfy their bases.
  • Hedge funds are increasing their short positions on the belief that the AI frenzy driven rally is overdone.  On one hand, hedge funds are sophisticated and do great analysis.  On the other hand, if the market continues to go higher, hedge funds will be forced to buy to cover their short positions, and thus provide significant additional fuel to power the stock market higher.
  • In The Arora Report analysis, the stock market would have been down 10% this year instead of being up about 9% if it was not for the artificial intelligence frenzy.  For those wanting next-level information, the podcast titled “Don’t Be Fooled: AI Frenzy Driving Unhealthy Stock Market” is now live.
  • Nvidia (NVDA) stock is the leader of the artificial intelligence stock market rally.  Nvidia earnings are Wednesday after the close.  Nvidia earnings have the potential to change the course of the AI frenzy driven stock market rally.
  • As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 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

Saudi Energy Minister is warning speculators who are short selling oil of pain. OPEC+ appears to be working on a surprise to run up 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 rallying and is now above $27,000. Contrary to the belief in the stock market, the reason that is being promoted to buy bitcoin is the potential failure of debt ceiling talks.

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 $1960, silver futures are at $23.36, and oil futures are at $73.07.

S&P 500 futures are trading at 4193 as of this writing.  S&P 500 futures resistance levels are 4200, 4318, and 4400: support levels are 4000, 3950, and 3860.

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DJIA futures are down 85 points.

 

CHINA RETALIATES WITH MICRON BAN – BIDEN EXPECTS RELATIONS TO IMPROVE WITH CHINA

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

China Ban

Please click here for a chart of Micron stock (MU).

Note the following:

  • The Morning Capsule is about the big picture, not an individual stock.  The chart of Micron stock is being used to illustrate the point.
  • Prudent investors are taking into account the deteriorating relationship between China and the U.S. when determining their equity allocations.  There is significant risk to companies of popular stocks such as Apple (AAPL), Tesla (TSLA), Nike (NKE), and Starbucks (SBUX).  As a full disclosure, ZYX Short just closed a nicely profitable trade on Starbucks.
  • President Biden said that he expects relations with China to improve soon.
  • Only a few hours later, China announced a ban on Micron’s chips.  The ban is clearly in retaliation for U.S. restrictions on exports of advanced semiconductors and advanced semiconductor manufacturing equipment to China.  The U.S. especially wants to slow down the development of artificial intelligence in China.
  • The chart shows that Micron stock has been running up on artificial intelligence (AI) excitement.
  • Micron is the largest U.S. headquartered manufacturer of semiconductor memory.
  • Generative AI is going to significantly increase the demand for memory.
  • The chart shows when MU stock broke out on AI excitement.  Adding to excitement was a large subsidy from the Japanese government for a manufacturing plant in Japan.
  • RSI on the chart shows that Micron is overbought.  This is the case for most AI stocks.
  • The reason China is targeting Micron is that China can get the same products from Samsung (SSNLF) and Hynix.
  • On the surface, the ban impacts only large Chinese companies.  In The Arora Report analysis, smaller Chinese companies will also stop buying Micron products.  
  • Micron is saying that it will work with the Chinese government.
  • Micron’s CFO is saying that the impact is likely to be low single digits to the revenues. Remember that a big part of his compensation is in Micron stock and part of his job is to run up Micron stock.
  • In The Arora Report analysis, the impact can easily be close to 10%.  Micron sales to mainland China headquartered companies in 2022 were $3.311B or about 14% of revenue. Sales to Hong Kong headquartered companies were $1.665B or about 7% of total revenue. 
  • As of this writing, the stock market is ignoring what China has done and staying bullish on Micron based on Micron CFO’s statement, BIden’s statement, and a scheduled visit to the U.S. this week by the Chinese Commerce Minister.
  • A fortune is to be made in artificial intelligence, but investors will need to have the knowledge and will need to be careful.  Chinese ban on Micron illustrates the point.  For those seeking next-level knowledge, a podcast titled “Don’t Be Fooled: AI Frenzy Driving Unhealthy Stock Market” will go live shortly.  The podcast will be available in Arora Ambassador Club.
  • On Friday, Republicans put a pause on debt ceiling negotiations.  This morning, the stock market is encouraged about debt ceiling negotiations.  Short sellers are covering their shorts as of this writing in anticipation of a deal.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 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 under $27,000.

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 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 $1978, silver futures are at $23.94, and oil futures are at $72.04.

S&P 500 futures are trading at 4206 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 7 points.

 

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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.

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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