Human-Like Reasoning 'Strawberry' Ahead, Aggressive Nvidia Buying, Hotter Inflation Data

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

Human-Like Reasoning AI Ahead

Please click here for an enlarged chart of NVIDIA Corp NVDA.

Note the following:

• This article is about the big picture, not an individual stock.  The chart of NVDA is being used to illustrate the point.
• The chart shows that last week NVDA stock touched the top band of the support zone.
• RSI on the chart shows that NVDA was oversold when it touched the top band of the support zone.  Oversold stocks tend to bounce.  The chart shows this is exactly what was happening until yesterday.
• In yesterday's Morning Capsule, we wrote:

In the early trade, the momo crowd is ignoring the data and aggressively buying the slight dip in AI stocks.  The buying in AI stocks is due to front running a speech by Nvidia’s Jensen Huang.  The buying is especially aggressive in Nvidia (NVDA).

• When Jensen Huang did not say anything new to run up NVDA stock, NVDA stock pulled back.  After NVDA stock pulled back, a new momo guru narrative started taking hold.  We wrote yesterday in a post in ZYX Buy and ZYX Allocation:

This afternoon, the momo crowd is again extremely aggressively buying semiconductor stocks as momo gurus’ new narrative takes hold.  Momo gurus have all but anointed Harris as the next president after last night’s debate performance.  Momo gurus’ new narrative is that Harris will not be harsh on China like Trump, and there will be no tariffs.  This will provide an opportunity for semiconductor companies to sell more semiconductors to China.

• We also wrote:

In The Arora Report analysis, there are two major problems with the new momo guru narrative:

• It is premature to anoint Harris as the next president.
• Even if Harris is elected president, she is not going to give away AI technology to China.

• As NVDA stock started moving up, analysts started reminding investors of the regurgitation of high demand from Huang's speech and that Blackwell is coming.  This brought in additional buying.
• The chart shows that when NVDA stock broke above the mini support zone (previously mini resistance zone).
• As NVDA stock broke above the top band of the mini support zone, technical analysts started declaring the correction in NVDA over.  This brought in extremely aggressive buying in NVDA and other AI stocks going into the close.
• In the early trade prior to the release of PPI data, buying in NVDA and other AI stocks such as Advanced Micro Devices, Inc. AMD, Arm Holdings PLC – ADR ARM, Applied Materials, Inc. AMAT, Broadcom Inc AVGO, and Taiwan Semiconductor Mfg. Co. Ltd. TSM was very aggressive.
• After release of PPI data, some selling is coming in to take advantage of the strength.
• Yesterday, we shared with you that CPI was hotter than expected.  This morning Producer Price Index (PPI) came hotter than expected.  Here are the details:
  • Headline PPI came at 0.2% vs. 0.2% consensus.
  • Core PPI came at 0.3% vs. 0.2% consensus.
• In The Arora Report analysis, after hotter PPI data, it will be safer for the Fed to not cut rates in September and wait for more data before cutting rates in October.  Further, in The Arora Report analysis, the Fed should definitely not cut interest rates by 50 bps.  Hotter inflation data is a negative for the stock market.  However, right now, the momo crowd is oblivious and aggressively buying stocks.  
• New AI developments are exciting, but investors need to do a 360 degree analysis.
• Jobless claims came at 230K vs. 229K consensus.  This indicates that the jobs picture is staying strong.  Jobless claims is a leading indicator and carries heavy weight in our adaptive ZYX Asset Allocation Model with inputs in ten categories.  In plain English, adaptiveness means that the model changes itself with market conditions.  Please click here to see how this is achieved.  One of the reasons behind The Arora Report's unrivaled performance in both bull and bear markets is the adaptiveness of the model.  Most models on Wall Street are static.  They work for a while and then stop working when market conditions change.
• Adding to the excitement this morning is that OpenAI, the maker of ChatGPT, is about to release a new AI model called Strawberry.  Strawberry is capable of some human-like reasoning.   
  • OpenAI's valuation has now vaulted to $150B.

Europe

The European Central Bank (ECB) has cut interest rates by 25 basis points. This is inline with the consensus.

The interest rate differential between the U.S. and Europe has now widened, putting pressure on the Fed to cut rates.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Alphabet Inc Class C GOOG, Meta Platforms Inc META, and Nvidia (NVDA).

In the early trade, money flows are neutral in Apple Inc AAPL, Amazon.com, Inc. AMZN, and Microsoft Corp MSFT.

In the early trade, money flows are negative in 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 was seeing buying with tech stocks prior to the release of PPI data.  However, after the release of PPI data, selling has come into 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.

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.