This Chart Before Buying AI Stocks, Apple Loses $14B Fight

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

Major Negative Pattern Developing

Please click here for an enlarged chart of VanEck Semiconductor ETF SMH.

Note the following:

• A large number of stocks benefiting from artificial intelligence are semiconductor stocks.  Examples are NVIDIA Corp NVDA, Advanced Micro Devices, Inc. AMD, Micron Technology Inc MU, Arm Holdings PLC – ADR ARM, and Applied Materials, Inc. AMAT.
• The chart shows that a heads and shoulders pattern is developing in semiconductor ETF SMH.  The chart shows the left shoulder, the head, and the developing right shoulder.
• The chart shows the neckline.
• The pattern will be complete only if the neckline is broken.  If the neckline is not broken, the developing pattern will be negated.
• The foregoing is a heads up for those who are buying AI and semiconductor stocks and ETFs that are now falling in the buy zones.  In practical terms, there is no change in the guidance given in the Afternoon Capsule on September 6.
• The head and shoulders pattern works about 70% of the time.
• RSI on the chart shows that semiconductors are oversold.  Oversold stocks and ETFs tend to bounce.
• Yesterday, Apple Inc AAPL introduced the iPhone16.  At The Arora Report, we paid careful attention to the event. There is no change to the analysis The Arora Report provided you in advance of the event.
• In yesterday's Morning Capsule, we wrote:

Apple is clearly anxious about today’s event, as demonstrated by the fact that this event is taking place on a Monday, whereas Apple generally does not hold major events on Mondays.  Apple is trying to get ahead of a potential European Commission decision on Apple being forced to pay $14B in taxes.

• Apple's anxiety was justified.  Apple has lost the $14B tax fight.  Apple's loss means that going forward Apple will have a higher tax burden in Europe.
• CPI data will be released tomorrow at 8:30am ET.  Here are the expectations:
  • Headline consensus is 0.2%.
  • Core consensus is 0.2%.
• The market is positioned for CPI to be benign.  If CPI is much hotter than expected, due to market positioning, significant downside is probable.  Positioning is an important Wall Street mechanic.  Understanding Wall Street mechanics gives investors several big edges.  Due to their high value, Wall Street professionals keep the details of Wall Street mechanics close to their chest.
• Sentiment has quickly turned very positive.
• There are crosscurrents in the markets based on buying and selling by those who are driven by partisan politics ahead of the presidential debate between Harris and Trump.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOG, Meta Platforms Inc META, Microsoft Corp MSFT, NVDA, and Tesla Inc TSLA.

In the early trade, money flows are negative in AAPL.

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

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.