Pay Attention To Very Positive Positioning, Critical Metals And Cloud Computing Restrictions

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

Very Positive Positioning

Please click here for a chart of semiconductor VanEck Semiconductor ETF SMH.

Note the following:

• The chart is a weekly chart to give you a longer term perspective.
• Semiconductors are the leading sector as we have previously written.  Semiconductors have also been a prime beneficiary of the artificial intelligence (AI) frenzy. For the direction of the stock market, investors should pay attention to the semiconductor sector in addition to the group of magnificent seven stocks 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.
• The chart shows the move up in semiconductors when Nvidia projected $11B in revenues vs. about $7B consensus.
• The chart shows that semiconductors are consolidating in a range. Investors should look for a breakout or a breakdown from a consolidation range for the market direction.
• RSI on the chart shows that on a weekly basis semiconductors are overbought. When a sector is overbought, it is vulnerable to pullbacks. However, there is a special factor of the AI frenzy. Due to AI frenzy, pullbacks will likely be shallow and buying opportunities.
• Investors should pay attention to positioning. Positioning in semiconductors is now extremely positive. Positioning in the overall stock market is now very positive. Positioning is a very important Wall Street mechanic that all investors should strive to develop a deep understanding of as it can give you a big edge.  For those wanting a deep understanding of positioning, listen to the podcast “Market Mechanics: Positioning.”
• The general rule from a long term perspective is to buy new positions, add to positions, and start trade around positions when positioning is very negative to extremely negative and to take profits on tactical positions and initiate short positions when positioning is very positive to extremely positive.
• The news from China is that China is restricting the export of gallium, germanium, and other related materials. These metals are critical for certain semiconductor, electric vehicle, solar, defense, and automotive applications.
• Between 2018 - 2021, 53% of the gallium used in the U.S. was imported from China. In 2019, the U.S. increased tariffs on Chinese gallium, reducing imports. However, these numbers are deceptive in that these materials are often exported from China to other Asian countries such as Taiwan, Japan, South Korea, and Thailand, and then finished products are imported to the U.S.
• Stocks of Chinese gallium and germanium companies are jumping as much as 10%. In theory, stocks of such companies should go down because they will have more restrictions on exports and lower revenues.  In practice, these companies may be able to smuggle their goods outside China and, in the process, charge higher prices.  
• Among the U.S. semiconductor companies, there may be a negative impact on Skyworks Solutions Inc SWKS, Qorvo Inc QRVO, and Wolfspeed Inc WOLF.
• In separate news, Japanese company Renesas Electronics Corp RNECF, headquartered in Tokyo, is providing a $2B deposit to Wolfspeed for a 10 year silicon carbide supply agreement.  Silicon carbide power devices are playing an increasing role in electric vehicles and renewable energy.  For this reason, Wolfspeed stock is jumping in spite of the China news.
• Until now, it has been easy for Chinese companies to circumvent U.S. restrictions on the export of advanced Nvidia chips to China.  The U.S. has imposed its restrictions to slow down the development of artificial intelligence in China. Chinese companies have been able to get around these restrictions by simply using the cloud capacity of Microsoft and Amazon.  Now, the U.S. is planning to restrict U.S. cloud companies from providing certain cloud infrastructure to Chinese companies.  This is negative for Microsoft, Amazon, and Nvidia.
• Prudent investors are paying attention that worsening relations between the U.S. and China on technology pose a serious risk not only to the companies named above but pose a more serious risk to companies deriving significant revenue from China such as Apple and Tesla.  The momo crowd is oblivious and continues to aggressively buy Apple and Tesla stocks.
• Secretary of the Treasury Janet Yellen is starting her visit to China in an attempt to thaw relations.
• In The Arora Report analysis, Yellen’s trip to China will likely be showcased as a success by both the U.S. and China.  However, nothing is going to change in the longer term geopolitics as China remains determined to dethrone the U.S. as the number one super power. 
• As we have written before, July is a seasonally positive month for the stock market.
• As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

Blind Money

Blind money is the money that pours into Wall Street at the beginning of the month without any analysis.  This month, due to the holiday, blind money will be invested mostly in the afternoon today and tomorrow.

China PMI

The latest PMI numbers from China show that recovery is not taking hold.  Caixin Services PMI came at 53.9 vs. 57.1 prior.  Caixin Manufacturing PMI came 50.5 vs. 50.9 prior.

Momo Crowd And Smart Money In Stocks

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

Oil

Oil is giving back its gains on the news of output cuts by Saudi Arabia.  In The Arora Report analysis, the reason Saudi production cuts are not succeeding in running up oil is the relationship between Russia and India as well as Russia and China. 

The momo crowd is like a yoyo in oil in the early trade.  Smart money is inactive in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin BTC/USD is range bound.

Markets

Our very, very short-term early stock market indicator is negative.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

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 holding 21% - 39% in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 3% - 6%, and short term hedges of 5% - 8%. 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 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 2008 financial crash, the start of a mega bull market in 2009, the COVID crash, the post-COVID bull market, and the 2022 bear market.  Please click here to sign up for a free forever Generate Wealth Newsletter.