An Non-AI Stock Reddit Shows Expanding AI Exuberance, Important Treasury Auction Ahead, Fed MIA

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

AI Exuberance Expands

Please click here for an enlarged version of the chart of Reddit Inc RDDT.

Note the following:

• This article is about the big picture, not an individual stock. The chart of RDDT stock is being used to illustrate the point.
• Reddit is a social media company best known for the meme crowd running up meme stocks such as GameStop Corp GME and AMC Entertainment Holdings Inc AMC. Reddit is also home to the YOLO (you only live once) crowd.
• Reddit came public at a price of $34 per share, the high end of the range. As a full disclosure, RDDT is in The Arora Report portfolio.
• The chart shows that options started trading on RDDT stock yesterday.
• The chart shows that RDDT stock took off, rising 30% to $59.80.
• The chart shows that RDDT stock kept running yesterday after hours and has continued to run in the premarket today, up another 13.7%.
• Reddit is a 19 year old company that is unprofitable and cash flow negative.  
• The narrative that is taking hold is that AI stocks such as NVIDIA Corp NVDA have already run up. Now, investors need to find AI adjacent stocks. The meme and momo crowds have chosen RDDT.
• The story is that RDDT data is valuable as it can be used to train large language models. Bulls cite a $60M deal with Google. The deal with Google is already under regulatory scrutiny.
• Take a moment to think about this; if you were a stock market investor and you went to an AI chatbot for answers, would you want answers based on the thinking of the meme crowd and the YOLO crowd? Most of you would say “no.”  The absurdity of what is happening, as illustrated by the move in RDDT stock and many others, is primarily the result of two factors:
  •  Extremely positive sentiment
  • Very easy financial conditions
• Historically, when financial conditions are this easy, the Fed steps in to put on the brakes. However, the Fed appears to be a lost cause, at least for now.  It appears that instead of staying true to its mandate of price stability and maximum employment, in reality, the Fed is embarking on over goosing the economy and promoting speculation. The Arora Report is apolitical. Our sole job is to help investors. Some conservatives are claiming that the purpose of the Fed over goosing the economy is to re-elect Biden.  Trump has already said that he will not reappoint Powell.
• In The Arora Report analysis, there is a high probability that the data will show the Fed the error of over goosing the economy, and the Fed will go back to its function of applying the brakes to maintain price stability.
• Durable good orders are strong.  Here are the details:
  • Durable goods came at 1.4% vs. 1.3% consensus.
  • Durable good ex-transportation came at 0.5% vs. 0.4% consensus.
• Consumer confidence will be released at 10am ET.  This may be market moving.
• $67B 5-year Treasury auction is ahead.  The auction is expected to be good.  However, in The Arora Report analysis, prudent investors need to be concerned about larger and larger sizes of Treasury auctions as the U.S. budget deficit balloons. If a Treasury auction is bad, or even worse fails, it can lead to a 30% - 50% retrenchment in the stock market.  This is a reason to pay attention to the protection band. 

Magnificent Seven Money Flows

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

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

The momo crowd is buying stocks in the early trade. Smart money is inactive in the early trade.

Gold

The momo crowd is buying gold in the early trade. Smart money is inactive in the early trade.

For longer-term, please see gold and silver ratings.

The most popular ETF for gold is SPDR Gold Trust GLD. The most popular ETF for silver is iShares Silver Trust SLV. 

Oil

The momo crowd is buying oil in the early trade.  Smart money is inactive in the early trade.

For longer-term, please see oil ratings.

The most popular ETF for oil is United States Oil ETF USO.

Bitcoin

Bitcoin BTC/USD is over $70,000 as the pump continues about bitcoin halving.

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.

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 seven 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.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.