Trump Trade May Reverse As Probability Of Biden Backing Out Increases – Watch AI Semiconductors

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

Watch Trump Trade

Please click here for an enlarged chart of Taiwan Semiconductor Mfg. Co. Ltd. TSM.

Note the following:

• This article is about the big picture, not an individual stock.  The chart of TSM stock is being used to illustrate the point.
• TSM is important because it is the largest semiconductor foundry in the world.  More importantly, TSM manufactures nearly all of the advanced AI chips. NVIDIA Corp NVDA GPUs are manufactured by TSM.
• The chart shows that the Trump trade caused the upward sloping trendline to be broken.
• The chart shows a gap down on Trump’s comments about Taiwan and China.
• The chart shows that volume was high as the stock fell on Trump’s comments. This indicates that the Trump trade has conviction.
• The chart shows that TSM is attempting a bounce after reporting excellent earnings.
• TSM reported earnings better than consensus and whisper numbers.  Here are the details:
  • Over 50% of revenues are coming from AI and advanced chips.
  • Q2 earnings came at $1.48 vs. $1.41 consensus.
  • Revenues grew 34.6% year-over-year.  Revenues came at $20.82B vs. $20.33B consensus.
  • The company guides Q3 revenue of $22.4B - $23.2B vs. $22.64B consensus.
  • The company guides gross margin in the range of 53.5% - 55.5%.
  • The company guides operating margin between 42.5% - 44.5%.
• RSI on the chart shows that it is not yet oversold.  This indicates that it is too early to step in to buy, even for those who are oblivious to the China risk.
• One result of the Trump trade gaining popularity is that yesterday was the worst day for semiconductors since the fall in semiconductors in March 2020 due to COVID.  
• The Trump trade is not all negative.  As we have previously shared with you, the Trump trade is driving money into small caps and bank stocks.  Of note are extremely positive money flows in iShares Russell 2000 ETF IWM, SPDR S&P Bank ETF (KBE), and SPDR S&P Regional Banking ETF KRE.  As full disclosure, IWM and KBE are in The Arora Report's ZYX Allocation Model Portfolio.
• It is worth a reminder that The Arora Report is politically agnostic.  Our sole job is to help investors extract the maximum amount of money with the lowest possible risk from the markets.
• The Arora Report shared with you early on that Trump becoming the next president had become the highest probability scenario.
• In The Arora Report analysis, the probability of Biden backing out and Democrats picking a new candidate has risen overnight.
• The take home message for investors is that if Biden backs out, the popular Trump trade may reverse.
• In The Arora Report analysis, to gauge early signs of the Trump trade reversing, investors should watch AI semiconductors such as NVDA, ASML Holding NV ASML, Applied Materials, Inc. AMAT, Micron Technology Inc MU, Arm Holdings PLC - ADR ARM, Broadcom Inc AVGO and Advanced Micro Devices, Inc. AMD as well as small caps.
• It is important to separate your politics from your investments.  The election is a significant event ahead that can make a major difference to your portfolio. 
• Initial jobless claims came at 243K vs. 225K consensus.  This indicates that the jobs picture is beginning to weaken.  Right now, investors like more people getting laid off because to investors it means a higher probability of a Fed rate cut.  In The Arora Report analysis, right now, investors are oblivious that a weakening jobs picture also means that earnings may not be as good in the upcoming quarters as investors anticipate. 

Europe

European Central Bank (ECB) is leaving rates unchanged as expected.  Lagarde is saying that there is no pre-commitment to any one rate path.

In The Arora Report analysis, investors should focus on the September rate decision.

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 continues to see buying as part of the Trump trade.

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.

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