Smart Money Sells Momo Crowd's Favorite AI Stock, Bank Of Japan Rescues The U.S. Stock Market

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

BOJ Saves The U.S. Stock Market

Please click here for an enlarged chart of Super Micro Computer Inc SMCI.

Note the following:

• This article is about the big picture, not an individual stock.  The chart of SMCI stock is being used to illustrate the point.
• SMCI is a favorite AI stock of the momo crowd.
• The momo crowd was eagerly awaiting SMCI earnings, hoping it would run up back to over $1000 and take the rest of the AI stocks much higher along with it.
• In The Arora Report analysis, the average cost of the momo crowd for SMCI is above $1000.  As of this writing in the premarket, SMCI is trading at $529.94.
• After the earnings release yesterday in the after market, the momo crowd immediately ran up SMCI stock to $727.70.  The momo crowd was excited about the 10 for 1 stock split.
• Smart money took advantage of the strength generated by momo crowd buying to start selling SMCI.  The reason smart money sold SMCI is that gross margins came at 11.3% vs. 14.1% consensus.
• Investors should note that after the drop caused by smart money selling, SMCI has not been able to significantly rally so far in spite of CEO Charles Liang saying that margins will rise to 14% – 17% in FY25.
• The chart shows that from its peak, SMCI stock has lost 56.4%.
• The chart shows that at least a modicum of sanity is beginning to set in in AI stocks after the unrestrained frenzy caused by incessant momo crowd buying.
• The chart should not surprise you because as readers of The Arora Report, you knew a drop was coming.  The high in SMCI occurred on March 8.  Four days before the high, on March 4, we wrote in the Morning Capsule,

SMCI has become a favorite of the momo crowd.  The momo crowd incorrectly thinks SMCI has the same potential as NVIDIA Corp NVDA.  Investors need to keep in mind the following:

• SMCI moves a lot more than NVDA.  SMCI is so volatile because of the small float.
• SMCI is an assembler of servers for artificial intelligence.  It uses components from NVDA, Micron Technology Inc MU, and Marvell Technology Inc MRVL.
• NVDA has a large moat to protect it that includes IP for its GPUs.  SMCI has no moat and the barrier to entry for competitors is low.
• SMCI sales are to hyperscalers like Microsoft Corp MSFT, Amazon.com, Inc. AMZN, and Alphabet Inc Class C GOOG.  The reason SMCI sales are booming is that they have availability of NVDA chips.  As chips become more available to competitors, SMCI will not be able to sustain its sales growth rate.
• The momo crowd is buying SMCI due to lack of knowledge.  However, there are many investors who understand and have the knowledge of SMCI’s business.  Many such investors are short selling SMCI.  For the time being, short sellers are being overwhelmed by the YOLO crowd.
• Taking all of the above into consideration with the quantitative analysis screen of the ZYX Change Method, in an optimistic case, the fair value of SMCI stock is $442 – $486.

• As we have previously written and has been demonstrated, a fortune is to be made in artificial intelligence between now and 2030.  However, it is not going to be a straight line.  At times, it is going to be treacherous.  Based on the feedback from investors so far, it is clear that investors who are developing in depth knowledge of investing in AI are doing better than those who are not.  The problem investors face is that it is very difficult to find objective investing information on AI as a vast majority of the content in the media is produced with an agenda that is not in investors' best interest.
• A number of indicators yesterday afternoon were showing that the bounce from Monday's low was running out of steam.  When SMCI fell, other AI stocks also fell in the after market.  Yesterday evening, it was evident that the most likely course for the stock market today would be to go down.  At one point, Japanese stocks were down 2%.
• Bank of Japan (BOJ) saved markets across the world, including the U.S. stock market.  BOJ Deputy Governor Shinichi Uchida said that BOJ will not raise interest rates if markets are unstable.  Markets in Asia immediately rallied.  The strength carried on to Europe and now to the U.S. 
• The yen has fallen on Uchida's statement.  As full disclosure, The Arora Report's ZYX Allocation has a position in FXY and gave a signal Monday to take partial profits near the high.
• With support from BOJ, the urgency among funds to unwind the carry trade has disappeared.  In The Arora Report analysis, some funds may begin establishing new carry trade positions by borrowing in yen and investing the money in U.S. stocks. However, this is only for the short term.  In the longer term, the carry trade will unwind again as the yen is very undervalued.  
  • The Arora Report call is that ultimately the yen can reach 120 yen to a dollar.  As a reference, the yen is trading around 147 as of this writing.  

Magnificent Seven Money Flows

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

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

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust GLD.  The most popular ETF for silver is iShares Silver Trust SLV.  The most popular ETF for oil is United States Oil ETF USO.

Bitcoin

Bitcoin BTC/USD is seeing buying on the drop in the yen.

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 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.

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.