China Bazooka Brings Optimism To U.S. Stocks, Micron Earnings Show The Value Of Knowing Positioning

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

Growing Optimism

Please click here for an enlarged 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.
• In yesterday's Morning Capsule, we wrote the following about Micron earnings in advance:
• 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.

• The chart shows a strong up move in MU after earnings were released after the market closed yesterday.
• The chart illustrates the value of understanding positioning and the big edge it gives to investors. Micron earnings were mediocre.  The real reason behind the strong move is negative Wall Street positioning.  If the same earnings would have come out a few months ago, when Wall Street positioning was very positive, the stock would have been down $20. 
• The chart shows that in the premarket, MU is breaking above the resistance zone. If MU closes above the resistance zone shown on the chart, this zone will become a support zone.
• The move up in MU stock is bringing in extremely aggressive buying in most semiconductor stocks in the premarket.  In turn, the buying is becoming aggressive in most AI stocks in the premarket.  
• We have been sharing with you details of China's stimulus plan.  Now, with a potential addition, China's stimulus plan is about to become a bazooka.
  • China is considering injecting up to one trillion yuan into state owned banks for the purpose of expanding their capacity to loan more money.
  • Stocks in Hong Kong are up 4.2% and up 3.6% in Shanghai.
• The strong move up in Chinese stocks brought in optimism first to Asian stocks, then to Europe, and now to the U.S. in a round robin fashion.
• In The Arora Report analysis, deflation in China has helped U.S. inflation.  Now all of the stimulus in China is going to start inflation in China.  Some of that inflation is going to come back to the U.S. at a time when the Fed is aggressively cutting rates.  All of this could spell trouble for the stock market down the road.  However, for the time being, no one is connecting the dots as the party shifts to full swing.  
• Weekly initial claims came at 218K vs. 224K consensus. This indicates that the jobs picture is strong
• Durable orders came stronger than expected.  Here are the key points:
  • Headline Durable Orders came at 0.0% vs. -2.9% consensus.
  • Durable Orders Ex-Transportation came at 0.5% vs. 0.1% consensus.
• Just released GDP data shows that economic growth is strong.  Here are the details:
  • Q2 GDP Third Estimate came at 3.0% vs. 3.0% consensus.
  • GDP Deflator Third Estimate came at 2.5% vs. 2.5% consensus.
• The foregoing economic data is bringing in aggressive buying in the stock market.  The reason is that normally when the economy is this strong, the Fed is not aggressively cutting interest rates.  Here, the economy is strong, and the Fed is aggressively cutting rates.
• Here is the key question for prudent investors: Did the Fed make a mistake with the 50 bps cut?  Stay tuned for more.
• Powell comments are ahead and may be market moving.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Apple Inc AAPL, Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOG, Meta Platforms Inc META, Microsoft Corp MSFT, 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 along with tech stocks.

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.