Micron Earnings Ahead - Key To AI Trade; Biggest One Year Rate Cut In China

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

The Key To The AI Trade

Please click here for a chart of Micron Technology Inc 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.
• Micron is one of the three largest semiconductor memory makers in the world.
• The demand for high bandwidth memory for AI applications is rapidly increasing.
• The chart shows Micron's last two earnings and the market reaction.
• The chart shows that MU stock peaked with a bearish engulfing candle. A bearish engulfing candle is a negative pattern.
• The chart shows when the Arora signal was given to take partial profits.
• As full disclosure, MU is long from $21.77 in The Arora Report’s ZYX Buy portfolio that surrounds the Core Model Portfolio.
• The chart shows a very substantial drop in the stock.  There are two reasons for the drop:
  • From a fundamental perspective, the demand for memory in smartphones has been soft.
  • At its peak, MU had become a crowded trade, and Wall Street positioning had become extremely positive. These are the two factors that often lead to big drops.
• Going into earnings, here are the key points:
  • Whisper numbers are below the consensus numbers.  This is an oddity among AI stocks.  Among AI stocks, whisper numbers have consistently been higher than consensus numbers.
  • Wall Street positioning is negative.
  • The chart shows that MU stock has bounced off of the support zone.
  • Historically, when the foregoing factors are combined, the stock goes up after earnings.
• Micron earnings and the stock reaction will be an important key to the AI trade.
• Some of Micron's business is a commodity business and therefore does not have the same moat as Nvidia (NVDA).  Nonetheless, investors should be cognizant that many AI stocks have become crowded trades and Wall Street positioning is extremely positive.  This is the fifth stage of a change.  Please click here to see the five stages of a long trade.    Please click here for five stages of a short trade.
• As an actionable item, investors should pay attention to the protection band as well as posts calling for hedging AI stocks.
• We have seen sharing with you the stimulus measures the Chinese government has been taking and the resulting rally that is taking place in the Chinese stock market.  The latest is that China has now cut the one year policy rate by the largest amount ever, from 2.3% to 2%.
• The Arora Report has followed China continuously for the last 17 years.  The two ETFs of interest are Mainland China ETF Xtrackers Hvst CSI 300 China A Shs ETF Class A ASHR and Hong Kong ETF iShares China Large-Cap ETF FXI. 
• What happens in China has a major impact on all markets around the globe,including the U.S. stock market.  The world is interconnected.  Even investors who do not invest outside of the U.S. need to pay attention to what is happening in the rest of the world.
  • The Arora Report has continuously followed economic indicators in 23 countries over the last 17 years.
• Consumer confidence came at 98.7 vs. 102.9 consensus.  In The Arora Report analysis, this data went against the soft landing and no landing scenarios.  However, for the time being, the stock market celebrated lower consumer confidence on the hope that falling consumer confidence would lead the Fed to another 50 bps cut in interest rates.

Magnificent Seven Money Flows

In the early trade, money flows are positive in NVIDIA Corp NVDA.

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

In the early trade, money flows are negative in Apple Inc AAPL 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

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.

Footer: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.