Nvidia Driving Stock Market Rally, Average Stock Is A Different Story, AI Copper Trade Hurting

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

Pay Attention To The Average Stock

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

Note the following:

• The chart shows SPY compared to Invesco S&P 500 Eql Wght ETF RSP and NVIDIA Corp NVDA. SPY is cap weighted.
• The chart shows that SPY has gained 2.6% over the last 30 days while RSP has lost 2.45%.
• The chart shows that NVDA has gained 39.76% during the same period.
• Make no mistake, it is an NVDA rally, taking along other AI stocks. However, the average stock is doing poorly.
• History teaches that it is not prudent to become overly aggressive when the average stock is doing poorly.  
• As full disclosure, members and readers of The Arora Report are long NVDA stock from $12.55. The Arora target is $163 -  $172.
• The Arora Report was bullish on AI and NVDA before almost anyone else. Having said that, an important data point is that the most often asked question we get now is from investors wanting to jump on the bandwagon and buy NVDA stock now. Based on the history of the questions we have received over a long time, this indicates extreme bullish sentiment on NVDA stock. Consider the following:
  • Extreme bullish sentiment is a contrary signal. It is worth a reminder that sentiment is not a precise timing indicator.
  • Analysts who have been bullish on NVDA stock from much lower prices are not recommending jumping on the NVDA bandwagon now.
  • Analysts who totally missed NVDA’s rise are now jumping in, recommending their followers to go all in on NVDA.
  • The recent rise in NVDA is mostly driven by retail investors.
  • Historically, retail investors tend to be wrong at turning points.
  • Technically NVDA is very overbought.
• Investors should remember two historical factors:
  • Analysts are expecting NVDA to grow 70% per year over the next five years. This is something that no large cap U.S. stock has ever accomplished in the entire market history.
  • Out of the ten most popular stocks in 1988 that retail investors were rushing headlong to buy, eight no longer exist. The only two that still exist are IBM Common Stock IBM and General Electric Co GE.
• Prudent investors who do not already own NVDA stock may consider buying on a dip in the Arora buy zone.
• The Fed’s Kashkari said that the Fed can take its time before cutting rates.
• More Fed speak is ahead that may be market moving.
• The U.S. economy is 70% consumer based. Therefore, prudent investors pay attention to retail sales. All important retail sales data will be released tomorrow at 8:30am ET.

Red Hot Copper Trade

The AI driven red hot copper trade is getting hurt on data from China. Here are the two pieces of data from China that are hurting copper:

• House prices declined by 3.9% year-over-year.
• Industrial production grew by 5.6% year-over-year vs. 6.2% consensus.

Europe

There were early gains in Europe as investors bought on Marine Le Pen’s statement that she would cooperate with President Macron and respect political institutions. However, the rally was met with selling, causing gains to mostly disappear

Magnificent Seven Money Flows

In the early trade, money flows are positive in Apple Inc AAPL and Nvidia (NVDA).

In the early trade, money flows are neutral in Microsoft Corp MSFT and Tesla Inc TSLA.

In the early trade, money flows are negative in Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOG, and Meta Platforms Inc META.

In the early trade, money flows are negative in S&P 500 ETF (SPY) and positive in Invesco QQQ Trust Series 1 QQQ.

Momo Crowd And Smart Money In Stocks

The momo crowd is buying stocks in the early trade. Smart money is inactive in the early trade.

Note for new investors: 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.

Gold

The momo crowd is selling gold in the early trade. Smart money is inactive in the early trade.

For longer-term, please see gold and silver ratings.

The most popular ETF for gold is SPDR Gold Trust GLD. The most popular ETF for silver is iShares Silver Trust SLV. 

Oil

The momo crowd is buying oil in the early trade. Smart money is inactive in the early trade.

For longer-term, please see oil ratings.

The most popular ETF for oil is United States Oil ETF USO.

Bitcoin

Bitcoin BTC/USD is seeing slight selling in the early trade.

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 a protection band consisting of cash or Treasury bills or short-term tactical trades as well as short to medium term hedges and short term hedges. 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 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.

The Arora Report is known for its accurate calls. The Arora Report correctly called the big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, the DJIA rally to 30,000 when it was trading at 16,000, the start of a mega bull market in 2009, and the financial crash of 2008. Please click here to sign up for a free forever Generate Wealth Newsletter.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.