China Tightens Rare Earth Controls, TSMC Data Boosts AI Trade

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

Rare Earth Flex

Please click here for an enlarged chart of USA Rare Earth Inc (NASDAQ:USAR).

Note the following:

• This article is about the big picture, not an individual stock.  The chart of USAR is being used to illustrate the point.
• The chart shows our buy zone for USAR.
• The chart shows that USAR has about doubled since our buy zone.
• Based on the latest China news, how USAR stock performs will be a tell as to how much the market is already discounting.
• RSI on the chart shows USAR stock is overbought and vulnerable to a short term pullback.
• The chart shows the volume has been heavier on the rally.  This indicates conviction.
• The latest rally in USAR stock has been triggered by news that the U.S. government will take a stake in USA Rare Earth and help USA Rare Earth with buying by the Department of Defense, just like the U.S. government has done with MP Materials Corp. (NYSE:MP).
• Not long after the U.S. and China reached a deal regarding social media app TikTok, China and the U.S. are back to escalating tensions.  In the latest move, China is flexing its muscle by tightening control of rare earth minerals with additional export restrictions.  Licenses from the Chinese government will be required to export products with rare earth minerals for military applications and high-tech products.  Export of dual use materials will be restricted for Chinese national security.  License will be granted on a case by case basis.  Some of the new export restrictions will take effect immediately and others on December 1.
• Additionally effective November 8, China will also require licenses to export lithium batteries and equipment and materials needed to produce them.
• Taiwan Semiconductor Manufacturing Co Ltd (NYSE:TSM) reported September revenue increased 31.4% year-over-year and down 1.4% from month-over-month.  TSM reported January through September revenue up 36.4% year-over-year.  Revenue data from Taiwan Semiconductor Manufacturing Company is important because it manufactures AI chips for NVIDIA Corp (NASDAQ:NVDA), Advanced Micro Devices Inc (NASDAQ:AMD), Marvell Technology Inc (NASDAQ:MRVL), and Broadcom Inc (NASDAQ:AVGO). Data from Taiwan Semiconductor Manufacturing Company is boosting the AI trade.
• Also boosting the AI trade is news that Nvidia received approval to export some chips to the U.A.E.   Reportedly, Nvidia CEO Jensen Huang had been frustrated with the long delay preceding the approval.
• Earnings season is starting with PepsiCo Inc (NASDAQ:PEP) and Delta Air Lines Inc (DAL) reporting in the premarket.  Delta earnings are significantly better than the consensus and whisper numbers.  Following the very positive commentary from Delta, money is flowing into United Airlines Holdings Inc (NASDAQ:UAL), Southwest Airlines Co (LUV) and American Airlines Group Inc (AAL).
•  Powell made no comments on monetary policy during his opening remarks at the Community Bank Conference.  In our analysis, the stock market is likely to interpret no comment as bullish.  
• Initial jobless claims were not released as scheduled due to the government shutdown.

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks.  For this reason, to get ahead and get an edge, investors need to dig below the surface of the Mag 7 stocks.  It is equally important to rise above the noise of daily news on the Mag 7 stocks.  The best way to get an edge, dig below the surface, and rise above the noise of the daily news is to pay attention to early money flows in the Mag 7 stocks on a daily basis.  When there is significant news in the Mag 7 stocks that rises above the threshold of noise and impacts your entire portfolio, it is covered in the main section above.

In the early trade, money flows are positive in Nvidia (NVDA).

In the early trade, money flows are neutral in Alphabet Inc Class C (NASDAQ:GOOG), Meta Platforms Inc (NASDAQ:META), and Microsoft Corp (NASDAQ:MSFT).

In the early trade, money flows are negative in Apple (Apple Inc (NASDAQ: AAPL), Amazon.com, Inc. (NASDAQ:AMZN), and Tesla Inc (NASDAQ:TSLA).

In the early trade, money flows are neutral in SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust Series 1 (NASDAQ: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).

Gold

There is extremely aggressive buying in gold and silver this morning.  

Silver is trading up about 4% as of this writing.  Silver futures are only $0.10 away from the psychological resistance level of $50.  

Bitcoin

Bitcoin (CRYPTO: BTC) is range bound.

What To Do Now

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.

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