Super Micro Folly, Stock Market Direction Depends On Which Powell Shows Up – Objective Or Political

Author: The Arora Report | May 01, 2024 10:57am

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

Making A Fortune In Artificial Intelligence

Please click here for an enlarged chart of Super Micro Computer Inc (NASDAQ:SMCI).

Note the following:

• This article is about the big picture, not an individual stock. The chart of SMCI stock is being used to illustrate the point.
• Super Micro has been the most favorite artificial intelligence stock of the momo crowd. The chart shows the big drop in the stock on earnings released after the market closed.
• The chart shows a 40.5% drop since the high in March.
• RSI shown on the chart foretold what was to come.
• The momo crowd, including momo gurus, that ran up the stock did not really understand the server business.
• SMCI presents an important learning moment for prudent investors. These are four important points here:
  • What you do not buy is as important as what you buy.  
  • A little knowledge is a dangerous thing.  
  • The momo crowd’s history is that they make money because they run up stocks with their own buying. Subsequently, the momo crowd loses money when smart money sells into the strength. Often, the momo crowd loses more money than they make, resulting in a net loss.   
  • Follow smart money for investments. Selectively follow the momo crowd for very short term trades when there is a Signal or Signal Limited.  
• Members and readers of The Arora Report, already knew in advance what was to come. On March 4, right near the top of SMCI stock, we wrote:

• SMCI has become a favorite of the momo crowd. The momo crowd incorrectly thinks SMCI has the same potential as Nvidia (NVDA). Investors need to keep in mind the following:

  • SMCI moves a lot more than NVDA. SMCI is so volatile because of the small float.

  • SMCI is an assembler of servers for artificial intelligence. It uses components from NVDA, Micron (MU), and Marvell (MRVL).

  • NVDA has a large moat to protect it that includes IP for its GPUs. SMCI has no moat and the barrier to entry for competitors is low.

  • SMCI sales are to hyperscalers like Microsoft (MSFT), Amazon (AMZN), and Google (GOOG). The reason SMCI sales are booming is that they have availability of NVDA chips. As chips become more available to competitors, SMCI will not be able to sustain its sales growth rate.

  • The momo crowd is buying SMCI due to lack of knowledge.  However, there are many investors who understand and have the knowledge of SMCI's business. Many such investors are short selling SMCI.  For the time being, short sellers are being overwhelmed by the YOLO crowd.

  • Taking all of the above into consideration with the quantitative analysis screen of the ZYX Change Method, in an optimistic case, the fair value of SMCI stock is $442 - $486.

• You may recall that The Arora Report was the first one to identify that artificial intelligence was real in 2022. At that time, momo gurus were selling AI stock.
• A fortune is to be made in AI between now and 2030.  SMCI shows that at times it will be treacherous. You need expert guidance.  Equally important is building your knowledge of investments in AI. 
• FOMC will release its decision at 2pm ET today. FOMC is expected to keep interest rates unchanged. The key event is Powell’s conference. The data shows that professional traders are expecting higher volatility during Powell’s conference than at any other point over the last year. 
• In The Arora Report analysis, the near term direction of the stock market will come down to if objective Powell shows up or if political Powell shows up.  
  • If objective Powell shows up, expect the stock market to go down.  The reason is that the stock market is still levitating on hopium and not paying attention to the data.  
  • If political Powell shows up, expect a rip roaring rally. 
• We previously shared that prudent investors should pay attention to the Treasury refunding plan.
  • The Treasury plans to borrow $243B in the April to June quarter vs. $202B estimate.
  • The Treasury has just released the composition of the borrowing.
  • In The Arora Report analysis, the composition is more important than the increased amount of borrowing. Last time, the Treasury manipulated the borrowing to make stock and bond markets run higher. We will be carefully analyzing the just released new data.
• Automatic Data Processing Inc (NASDAQ:ADP) is the largest private payroll processor in the country.  It uses its data to give a glimpse of the jobs picture in advance of the official jobs report that will be released on Friday at 8:30am ET.  ADP employment change came at 192K vs. 175K consensus.  This indicates that the jobs picture is staying very strong.  In The Arora Report analysis, the strength is at the low end while the job picture remains weak in IT and finance.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc Class C (NASDAQ:GOOG), and Microsoft Corp (NASDAQ:MSFT).

In the early trade, money flows are neutral in Meta Platforms Inc (NASDAQ:META).

In the early trade, money flows are negative in Apple Inc (NASDAQ:AAPL), NVIDIA Corp (NASDAQ:NVDA), and Tesla Inc (NASDAQ:TSLA).

In the early trade, money flows are negative in SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust Series 1 (NASDAQ: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 (NYSE:GLD). The most popular ETF for silver is iShares Silver Trust (NYSE:SLV). 

Oil

The momo crowd is selling 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 (NYSE:USO).

Bitcoin

Bitcoin (CRYPTO: BTC) has fallen below $60,000 on momo crowd selling.  Recent momo crowd bitcoin buyers who fell prey to whales’ propaganda of buying on bitcoin halving and bought bitcoin above $70,000 are panicking and selling. Of course, if you listened to the podcast on bitcoin halving, you knew in advance that this was a high probability outcome.

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.

Posted In: $BTC AAPL ADP AMZN GLD GOOG META MSFT NVDA QQQ SLV SMCI SPY TSLA USO