AI Chip Manufacturer Breaks Out – Nvidia May Be Next, Consumer Splurges, Fed Spiked The Punch

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

Nvidia May Be Next

Please click here for an enlarged chart of Taiwan Semiconductor Mfg. Co. Ltd. TSM.

Note the following:

• This article is about the big picture, not an individual stock. The chart of TSM stock is being used to illustrate the point.
• TSM is the largest semiconductor foundry in the world for advanced semiconductors. TSM manufactures chips for the likes of NVIDIA Corp NVDA and Apple Inc AAPL.
• The chart shows the support/resistance zone. This was previously the resistance zone.
• The chart shows that TSM has broken out in the early trade after reporting earnings. If the breakout sustains, this zone will become the support zone.
• RSI on the chart shows that there is room for the stock to run.
• Going into earnings, whisper numbers for TSM were creeping up above the consensus. Whisper numbers are numbers that analysts privately provide to their best clients. Whisper numbers are often different from the numbers the same analysts publish for public consumption. Stocks move based on the difference between whisper numbers and the reported numbers. TSM reported numbers better than the whisper numbers.
• Here is the most important question for prudent investors: How do you reconcile ASML Holding NV (NASDAQ: ASML) earnings (please see yesterday's Morning Capsule) with TSM earnings? The answer is that TSM is more leveraged to AI, including Nvidia. This is the reason that The Arora Report gave a signal for a trade around position on NVDA stock earlier for aggressive investors.  The trade around position is separate and distinct from the core NVDA position that is long from $12.55.  
• The consumer is splurging again after a brief pullback. Prudent investors pay attention to consumers because the U.S. economy is 70% consumer based. Here is the latest retail sales data.
  • Headline retail sales came at 0.4% vs.-0.2% consensus.
  • Retail sales ex-auto came at 0.5% vs. 0.1% consensus.
• Initial jobless claims came at 241K vs. 270K consensus.
• Bonds are falling on the strong economic data.
• The retail sales data and the jobless claims data adds to the other data that shows the Fed cut spiked the punch with the 50 bps interest rate cut.
  • Before the Fed rate cut, we shared with you in The Arora Report analysis that the data justified a 25 bps rate cut.  The latest data shows that The Arora Report call was spot on, just like almost all Arora calls related to the Fed and the economy over the last 17 years.
• The Fed's job is to maintain stability and not to spike the punch. As a matter of fact, the Fed's job is to take the punch bowl away.
• In The Arora Report analysis, the reason that the stock market has not yet experienced the usual seasonal downturn in September and October is that the Fed spiked the punch in going against the hard data.  
• In earnings of note, Elevance Health Inc ELV, one of the largest licensee of Blue Cross Blue Shield, reported worse than expected earnings. The stock is down about 15% as of this writing in the premarket. As a reminder, previously, the nation's largest healthcare insurer UnitedHealth Group Inc UNH also reported rising medical costs.

Magnificent Seven Money Flows

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

In the early trade, money flows are neutral in Alphabet Inc Class C GOOG.

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 optimism that Trump will be elected.

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.