Opportunities For Investors As AI Frenzy Shifts From Semiconductors To Software

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

AI Frenzy Shifts

Please click here for an enlarged chart comparing VanEck Semiconductor ETF SMH and iShares Expanded Tech-Software Sector ETF IGV. 

Note the following:

• The Arora Report previously shared with readers that the next stage of AI would benefit software stocks.  This is beginning to happen now.  
• The chart shows software ETF IGV has moved up since the presidential election.  
• The chart shows that IGV has outperformed semiconductor ETF SMH by about 10% since the election.  
• The Arora Report algorithms show money is flowing out of semiconductors and into software.
• AI allows work processes to be totally reimagined compared to work processes of today.  Work processes of today are implemented with legacy software.  In The Arora Report analysis, it is an order of magnitude more efficient to use reimagined processes with AI native software.  
• In The Arora Report analysis, there is a battle brewing among software companies for market share when it comes to AI capabilities.  Legacy software companies have existing customers and cash to invest in AI.  Legacy software companies are bolting on AI offerings.  AI native software companies have an edge technologically.  However, they do not have an existing market share.  Promising AI native software companies are privately held.  
• The foregoing tells us that AI will end up decimating some software companies while others will go to new heights.  
• Investors need to look forward.  Right now, most investors who are investing in software companies are looking backwards.  
• Looking forward to 2030, the best way to capture AI opportunities in software companies is to combine the following three:
  • Profiting from a base position in a software ETF.  The Arora Report's software ETF of choice is IGV.  As full disclosure, IGV is in The Arora Report's ZYX Allocation Model Portfolio.  
  • Profiting from individual software company stocks that are evolving and keeping pace with AI developments and retaining and attracting customers.  An example is PLTR and as full disclosure, PLTR was recently added to The Arora Report’s ZYX Buy Core Model Portfolio.  
  • Profiting from shorting software companies whose business models are being hurt by AI.
• A judicious combination of the foregoing will produce significantly higher risk adjusted returns, compared to using only one of the three in your investments.  
• In the early trade, the momo crowd is aggressively buying junk stocks.  

China

Chinese stocks are ultra cheap.  The rally in Chinese stock has stalled after Trump's re-election.  Trump wants to impose 60% tariffs on Chinese goods.  In the face of Trump's threat, China's 10 year note auction saw strong demand.  The pricing was close to the record low yield.  This data point indicates that investors believe China will manage just fine with Trump's tariffs.  

In The Arora Report analysis, it is important to keep track of such data points.  If there are more such data points, it will be time to step into Chinese stocks because they are so cheap.  

Magnificent Seven Money Flows

In the early trade, money flows are positive in Amazon.com, Inc. AMZN and Tesla Inc TSLA. 

In the early trade, money flows are neutral in Apple Inc AAPL, Meta Platforms Inc META, and Microsoft Corp MSFT.

In the early trade, money flows are negative in Alphabet Inc Class C GOOG and NVIDIA Corp NVDA.

In the early trade, money flows are negative 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 approaching $100K. SEC Chair Gensler has said that he will resign on Trump's inauguration day.  Gensler has been anti-bitcoin.  Even though Gensler's resignation was expected, as Trump has said he would replace Gensler, buying came into bitcoin on the news.  

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.  The proprietary protection band from The Arora Report is very popular.  The protection band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors. 

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.