AI Favorite ARM Earnings Show Cracks Appearing In Ultra Bullish AI Story

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

Cracks In Ultra Bullish AI Story

Please click here for an enlarged chart of Arm Holdings PLC - ADR ARM.

Note the following:

• This article is about the big picture, not an individual stock. The chart of ARM stock is being used to illustrate the point.
• ARM has been one of the top artificial intelligence favorites of the momo crowd.
• ARM is a British semiconductor design firm that is mostly owned by Japanese company SoftBank Group Corp - ADR SFTBY. ARM is known for licensing its designs for smartphone CPUs, such as those used in Apple’s iPhones. Lately, ARM has been pivoting to artificial intelligence.
• The chart shows the gap down after the release of this quarter’s earnings. This indicates another crack in the ultra bullish short-term AI story promoted by momo gurus.
• The chart shows a gap up after last quarter earnings.
• Here are the details of ARM earnings:
  • ARM reported Q4 (March) earnings of $0.36 vs. $0.30 consensus.
  • Revenues came at $928M vs. $866M consensus.
  • Revenues rose 46.6% year-over-year.
  • For Q1 (June), the company projects earnings of $0.32 - $0.36 vs. $0.31 consensus.
  • The company projects revenues of $875M - $925M vs. $866M consensus.
  • For FY25, the company projects earnings of $1.45 - $1.65 vs. $1.54 consensus.
  • The company sees revenues of $3.8B - $4.1B vs. $3.98B consensus.
  • Royalty revenue was $514M up 37% year-over-year.
• The chart shows that from the peak after last quarter earnings to the recent low, ARM stock lost 47.8% of its value.
• The Arora Report was one of the first to pick up on the AI theme back in 2022 allowing readers and members of The Arora Report to buy artificial intelligence stocks near the lows before the run up started. NVIDIA Corp NVDA is a perfect example of the benefit of knowing early that a change is underway. Click here to see a chart of The Arora Report signals for NVDA.
• ARM stock is falling for two reasons.
  • Whisper numbers had moved much higher above the consensus going into earnings.  Stocks move based on the difference between whisper numbers and the actual numbers.  Whisper numbers are the numbers that analysts privately share with their best clients.  Whisper numbers are often different from the numbers the same analysts publish.  Whisper numbers is a technique used by analysts to drum up business. This is the reason that prudent investors do not depend on free data that floats around the internet and on the media. Prudent investors know better, but unfortunately many individual investors do analysis based on the free data and then spend years trying to figure out why their analysis never works out.
  • ARM beat the consensus numbers for the prior quarter and raised numbers for the current quarter over the consensus. However, it did not help because whisper numbers were so much higher.
  • For FY25, ARM guidance, even though inline with the consensus numbers, is way below the whisper numbers.
• On a separate note, in The Arora Report analysis Airbnb Inc ABNB projections indicate that the consumer may be pulling back on summer travel.
• Jobless claims came at 231K vs. 213K consensus. This indicates that the job market is beginning to slow.

U.K.

Bank of England (BOE) left its key interest rate unchanged at 5.25%. BOE is expected to cut rates in June.

BOE Governor Andrew Bailey says that BOE may reduce interest rates faster than markets expect.   

In The Arora Report analysis, BOE moves will likely encourage Powell to do what he is itching to do irrespective of the data.

China

The Chinese economy appears to be rebounding. Exports increased 1.5% year-over-year vs. 1.0% consensus.

Magnificent Seven Money Flows

In the early trade, money flows are neutral in Apple Inc AAPL, Amazon.com, Inc. AMZN, Alphabet Inc Class C GOOG, and Microsoft Corp MSFT.

In the early trade, money flows are negative in Meta Platforms Inc META, Tesla Inc TSLA, and NVDA.

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

The momo crowd is buying stocks in the early trade. Smart money is selling stocks in the early trade.

Gold

The momo crowd is inactive 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 GLD. The most popular ETF for silver is iShares Silver Trust SLV. 

Oil

The momo crowd is buying 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 USO.

Bitcoin

Bitcoin BTC/USD is seeing selling.

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 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.