Here Is What Not To Do When Investing In AI, ISM Ahead

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

Investing In AI

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 is being used to illustrate the point.
• SMCI has long been the second most favorite stock of the momo crowd.  A majority of the momo crowd positions were bought when the momo crowd was super excited on SMCI crossing above $1000.  As of this writing in the premarket, SMCI is trading at $432.24.
• The chart shows the SMCI stock took another leg down when SMCI said that it would not timely file its Annual Report on Form 10-K for the fiscal year ending June 30, 2024.  The delay is apparently due to weakness in internal controls.
• The chart shows that the drop was on heavy volume.  This indicates that sellers had conviction.
• RSI on the chart shows that the stock is oversold and can bounce.
• The chart shows that from the peak SMCI stock has fallen 67.6%. There is anecdotal evidence that many momo crowd investors were going all in on SMCI above $1000.  Such investors are now sitting on massive losses.
• The chart shows SMCI demonstrates the perfect example of what not to do when investing in AI.
• The chart should not surprise you because as a reader 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, 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.
• The spot on call above from The Arora Report demonstrates the wisdom of what The Arora Report has been sharing with you – 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, with both groups getting the same signals.
• ISM Manufacturing Index will be released at 10am ET and may be market moving.
  • The consensus is 47.5.
  • The prevailing wisdom among smart money is that a weaker number will mean weaker earnings and thus it will be negative for the stock market.
  • The prevailing wisdom among smart money is that a stronger number will be positive for the stock market.
  • The prevailing thinking among the momo crowd is that a weaker number will be one more data point for the Fed to cut rates in September by 0.5% instead of the consensus of 0.25%.  Thus, it will be a positive for the stock market.
  • The prevailing thinking among the momo crowd is that a strong number will be negative for the stock market.
• Today is the first trading day of the month.  The blind money is the money that pours into the stock market on the first two days of a new month without any analysis and irrespective of market conditions.  Blind money is not price sensitive, i.e. blind money does not care the price it is paying for the stocks. Most of the blind money is invested in the afternoon.  Traders know this and they typically buy stocks to sell to blind money at a higher price.
• This morning, traders are not front running blind money for three reasons.
  • September is traditionally a weak month.
  • There are new concerns about the yen strengthening and carry trade blowing up again.
  • ISM data is ahead.
• In the early trade, stocks are being sold on concern about the carry trade.  In a carry trade, investors borrow in yen to invest in stocks in the U.S., primarily in AI stocks.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Tesla Inc TSLA.

In the early trade, money flows are negative in Apple Inc AAPL, AMZN, GOOG, Meta Platforms Inc META, MSFT, and 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 range bound.

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.