AI Hype Meeting Reality, Fed Under Political Pressure To Cut Rates Quickly

AI Hype Meets Reality

Please see above for a chart of Microsoft Corp MSFT compared to Advanced Micro Devices, Inc. AMD and Alphabet Inc Class C GOOG. 

Note the following:

• The chart shows when earnings were released from MSFT, AMD, and GOOG. 
• The chart shows the drop in all three stocks on earnings.
• The Arora Report shared with you in advance yesterday:

Whisper numbers for Microsoft earnings are significantly higher than the consensus numbers. Stocks move based on the difference between whisper numbers and actual numbers. Whisper numbers are the numbers that analysts share privately with their best clients and are often different from the numbers the same analysts publish.

• In The Arora Report analysis, earnings from MSFT, AMD, and GOOG were good but did not meet the whisper numbers.
• In The Arora Report analysis, earnings from MSFT, AMD, and GOOG show that prospects for AI are excellent but less than the hype. Prudent investors need to remember that Wall Street is a great hype machine.   
• This morning in the early trade, tech stocks were seeing significant selling and then came the Automatic Data Processing Inc ADP employment change report. 
  • ADP is the largest payroll processor in the country. ADP uses its data to give an advanced glimpse of the jobs picture ahead of the official jobs report that will be released on Friday at 8:30am ET.  
  • ADP employment change came at 107K vs. 140K consensus.
  • Weakness in the ADP report brought aggressive buying into stocks. The reason is that if employment weakens, the Fed is more likely to cut interest rates.  
• The Fed rate decision will be announced at 2pm ET followed by Powell’s press conference at 2:30pm ET.  
• As a reminder, The Arora Report is a credible resource for investors that is politically agnostic. As the election approaches and emotions are running hot, most analysts have an agenda to favor Democrats or Republicans based on their own affiliation. This gets in the way of providing sound investment guidance. At The Arora Report, our sole job is to help investors without a political agenda.   
• In The Arora Report analysis, the Fed is coming under political pressure to cut rates quickly even though the data does not justify such a move.  
  • Democrats want the Fed to cut rates quickly to help Biden.  
  • Republicans want the Fed to cut rates now as they believe that if the Fed is cutting rates too close to the election, it will help Biden.  
• At The Arora Report, we will be analyzing the Fed’s statement and listening to Powell’s press conference for clues on when the first rate cut will occur.  
• As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the protection band. 

Magnificent Seven Money Flows

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

In the early trade, money flows are mixed in SPDR S&P 500 ETF Trust SPY and 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.

Gold

Historically, the momo crowd almost always buys gold ahead of Fed announcements. Today is no different. 

The momo crowd is buying 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

API crude inventories came at a draw of 2.5M barrels vs. a consensus of a draw of 0.867M barrels. This data is bullish.  

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 was seeing selling earlier in the morning and yesterday evening in sympathy with selling in tech stocks. As buying came in tech stocks on ADP data, buying is coming in bitcoin. 

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.

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 2008 financial crash, the start of a mega bull market in 2009, the COVID crash, the post-COVID bull market, and the 2022 bear market.  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.