AI Stocks Show Asymmetry On Expectations Proving Too High, Wall Street Preps For Presidential Debate

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

AI Expectations

Please click here for an enlarged chart of Micron stock (MU).

Note the following:

• This article is about the big picture, not an individual stock. The chart of MU stock is being used to illustrate the point.
• MU has become a favorite AI stock of Wall Street.
• The chart shows that MU stock has fallen after earnings.
• MU reported good earnings, but the stock fell because Micron’s guiding revenue was inline with consensus. Whisper numbers were for MU to guide higher than the consensus.
• The chart shows that MU is now below the trendline.
• The chart shows the volume was high going into earnings, indicating the market’s conviction for the stock to go higher after earnings.
• RSI on the chart shows that MU can go lower.
• Technical analysis is fine, but investors should perform a 360 degree analysis that synergistically optimizes technical analysis, fundamental analysis, macro analysis, and quantitative analysis.
• In The Arora Report analysis in the case of MU, even though technical analysis is giving a sell signal, after earnings, MU is still a buy on fundamental analysis, macro analysis, and quantitative analysis.
• In The Arora Report analysis, there are two very important observations from Micron earnings for investors:
  • AI is real, but the momo crowd has driven expectations too high. 
  • There is a strong asymmetry in AI stocks for the time being. The reaction to MU earnings illustrates the point. As of this writing in the premarket, MU stock is down about $6. On the other hand, if the revenue projection was only slightly higher, the stock would have been heading for about a $40 gain in the zone of $175 - $182 in the coming days.  Members and readers of The Arora Report have a long core position in MU from $21.77.    
• The presidential debate between Donald Trump and Joe Biden is tonight. Here are the key points for investors:
  •  First and foremost, The Arora Report is politically agnostic. The Arora Report’s sole job is to help investors make money by staying independent, objective, and highly analytical.
  • The prevailing wisdom on Wall Street is that if Trump wins the debate, the stock market will go down.
  • In The Arora Report analysis, investors should not buy into Wall Street’s prevailing wisdom.
  • Long time members of The Arora Report may recall that prior to the 2016 election, when Wall Street had anointed Hillary Clinton as the next president, The Arora Report had correctly called that Trump would win. At that time, The Arora Report was among the very tiny minority with the correct call.
  • When Trump won in 2016, Wall Street’s wisdom was that the stock market would fall.  In contrast, after Trump’s win, The Arora Report call was that the stock market would rise with DJIA reaching 30,000 in Trump’s first term.  At that time, no one had a call for DJIA to reach higher than 20,000.  History shows that The Arora Report had two perfect calls benefiting Arora Report members and readers.
• Initial claims came at 233K vs. 238K consensus. Investors should focus on the four week average. In the short term, momo gurus are not going to like this number.
• Durable orders are mixed.  Here are the details:
  • Headline durable orders came at 0.1% vs. -1.2% consensus.
  • Durable orders ex-transport came at -0.1% vs. 0.2% consensus.
• Q1 GDP-third estimate came at 1.4% vs. 1.3% consensus. This is a lagging indicator showing that the economy has been strong.
• 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. The protection band is one of the large number of unique edges that are available to members of The Arora Report.

Magnificent Seven Money Flows

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

In the early trade, money flows are neutral in Alphabet Inc Class C GOOG, Meta Platforms Inc META, and Microsoft Corp MSFT.

In the early trade, money flows are negative in NVIDIA Corp NVDA, and Tesla Inc TSLA.

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.

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.