Super Micro Dents AI Sentiment, Important Earnings From Microsoft And Meta Ahead, Economy Contracts

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

AI Sentiment

Please click here for an enlarged chart of Microsoft Corp MSFT.

Note the following:

  • This article is about the big picture, not an individual stock.  The chart of MSFT stock is being used to illustrate the point. 
  • The chart shows MSFT stock dipped in our buy zone before bouncing.
  • The chart shows two additional previous buy zones giving opportunities for newer members to build a strategic position in MSFT stock. 
  • In our analysis, Microsoft earnings are the most important earnings this earnings season.
  • The reason Microsoft earnings are the most important earnings of the season is there have been several rumors about Microsoft pulling back on capital expenditures related to AI.
  • Microsoft is aligned with OpenAI, the maker of ChatGPT.  Initially, OpenAI was going to exclusively use Microsoft's infrastructure.  Now, OpenAI is no longer working exclusively with Microsoft on infrastructure.
  • In our analysis, it is conceivable that the rumors about Microsoft are true, but it could be due to a shift in AI spend to OpenAI and not an indication of a reduction in AI demand.  We will be carefully listening to the Microsoft conference call for clarification.
  • Super Micro Computer Inc (SMCI) has dented AI sentiment this morning.  Super Micro is a provider of AI servers.  Super Micro Computer is cutting its Q3 EPS view to $0.29 – $0.31 from $0.46 – $0.62 and revenue view to $4.5B – $4.6B from $5B – $6B.  Here is the unanswered question for prudent investors: Is this reduction in demand for AI servers specific to Super Micro Computer, or is it happening across the board?
  • Automatic Data Processing Inc (ADP) is the largest private payroll processor in the country.  ADP uses its data to provide a glimpse of the official jobs report that will be released on Friday at 8:30am ET.  ADP employment change came at 62K vs. 128K consensus.
  • In our analysis, significantly weaker ADP data triggered significant selling when the data first came out.
  • GDP is a lagging indicator, but nonetheless important because the market pays attention to it.  Wet focus on leading indicators.  Here are the details of the data:
    • Q1 GDP Advanced came at -0.3% vs. 0.4% consensus.
    • Q1 GDP Deflator Advanced came at 3.7% vs. 3.1% consensus.
  • GDP data shows that the U.S. economy shrank.  In our analysis, investors should overlook this data because this data is distorted.  The distortion is due to front running tariffs.  Of course, as a reader of our report, you already knew in advance that front running tariffs would impact the economy, although the stock market was surprised this morning and the data is leading to selling.  We previously shared with you that the stock market was ignoring tariff pull forward.  
  • The Treasury has just released its refunding details.  This may cause volatility in bonds.

India And Pakistan

Pakistan is claiming that India is planning to attack Pakistan in 24 – 36 hours.  Prudent investors should keep an eye on the situation as it could lead to instability.

Magnificent Seven Money Flows

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

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 is range bound.

Arora Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.  Our proprietary Protection Band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.

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.

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