Prudent Investors Watching Risk To AI Stocks Like NVIDIA And AMD – Momo Monster Buying On Trump 2.0

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

Risk To AI Stocks

Please click here for an enlarged chart of ASML Holding NV ASML.

Note the following:

• This article is about the big picture, not an individual stock. The chart of ASML is being used to illustrate the point.
• ASML is a Dutch company that provides extreme ultra lithography equipment needed to manufacture advanced semiconductors.
• ASML has a near monopoly on making the most advanced machines.
• The chart shows that ASML stock has run up on AI exuberance.
• The chart shows that ASML stock is falling after the earnings report.
• The chart shows that there is a high probability of the gap being closed.
• If the gap is closed, the support zone shown on the chart will come into play.
• In The Arora Report analysis, ASML earnings were better than the consensus and whisper numbers. In our analysis, the stock is falling due to the Biden administration considering the most severe restrictions on the export of chip making equipment to China.  
• Semiconductor stocks such as NVIDIA Corp NVDA, Advanced Micro Devices, Inc. AMD, Taiwan Semiconductor Mfg. Co. Ltd. TSM, Micron Technology Inc MU, Arm Holdings PLC - ADR ARM, and Applied Materials, Inc. AMAT are falling on the potential China risk.
• Of interest is a report that Microsoft Corp MSFT and Alphabet Inc Class C GOOG are helping Chinese companies get Nvidia chips in spite of U.S. sanctions.
• Trump’s rhetoric is fueling more concerns among prudent investors about semiconductor stocks. Trump appears to be questioning Biden’s commitment to fully defend Taiwan.
• As prudent investors are carefully watching the risks, the momo crowd is oblivious and engaged in monster buying on the belief that Trump will be the next president.
• The Arora Report was early in sharing with you our analysis that the highest probability scenario was Trump becoming the next president.
• Prudent investors need to remember that high probability does not equate to a 100% guarantee. Things can change very quickly in politics. Only two months ago, Trump was facing massive legal problems, potential jail time, and a divided Republican party.  In a short time, due to Biden’s debate performance, the Supreme Court granting Trump immunity, and the assassination attempt on Trump, talk shifted from a close election to a Republican sweep.
• At The Arora Report we are making shifts in our portfolios to prepare for Trump 2.0.  We are also mindful that the present euphoria about a Republican sweep is not guaranteed to come to fruition.
• In a historic move, for the first time since 1971, a major index closed 4.4 standard deviations above the 50 day moving average. The index is the Russell 2000.  As full disclosure, Russell 2000 is represented by ETF iShares Russell 2000 ETF IWM, which is in the ZYX Allocation Model Portfolio.  In sympathy, another ZYX Allocation Model Portfolio position Royce Micro-Cap Trust Inc RMT, representing micro caps, has broken out.
• Money flows are very positive in stocks in the Dow Jones Industrial Average (DJIA), home builders, and banks, such as Bank of America Corp BAC and JPMorgan Chase & Co JPM.
• Trump appears to be warning Powell against cutting interest rates before the election.
• The Fed’s Beige Book will be released at 2pm ET.
• The Fed’s Thomas Barkin and Christopher Wallis will be speaking today.
• As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.   Please scroll down to see the protection band. The protection band is one of the large number of unique edges that are available to members of The Arora Report.

Housing Starts

Housing starts came at 1.353M vs. 1.310M consensus.

Building permits came at 1.446M vs. 1.391M consensus.

In The Arora Report analysis, the strength is in multi-family housing and not in single family housing.  

Japan

Japan appears to have intervened to support the yen.  As full disclosure, there is a position in yen in ZYX Allocation Model Portfolio.

Magnificent Seven Money Flows

In the early trade, money flows are negative in Amazon.com, Inc. AMZN, NVDA, MSFT, GOOG, Meta Platforms Inc META, Tesla Inc TSLA, and Apple Inc AAPL.

In the early trade, money flows are negative 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 continues to see buying on enthusiasm about Trump.

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.

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