AI Cap Ex

Please click here for an enlarged chart of Alphabet Inc Class C (NASDAQ:GOOG).

Note the following:

• This article is about the big picture, not an individual stock.  The chart of GOOG stock is being used to illustrate the point.
• The chart shows the spike up when Alphabet released earnings.  Earnings were better than the consensus and whisper numbers.
• The chart shows steady decline in Alphabet stock after the initial spike up.
• Our proprietary VUD indicator on the chart shows net supply of Alphabet stock after earnings release.  The VUD indicator is the most sensitive measure of net supply and demand in real-time. The orange represents net supply and the green represents net demand.
• Here are the reasons GOOG stock dropped after great earnings:
  • Google guided to a jaw-dropping $175B – $185B for capital spend in 2026 vs. $115B consensus.
  • Some investors are concerned about the high level of capital spend.  Times have changed – until recently, the stock market rewarded higher capital spend on AI.
  • GOOG stock is over-owned.  When a stock is over-owned, there are not many buyers left to drive it higher and the slightest selling can accelerate.
  • Going into earnings, sentiment on GOOG was extremely positive.  Extremely positive sentiment is a contrary signal, i.e. sell.  Keep in mind, sentiment is not a precise timing indicator.
• One of the tells for the entire stock market will be if bulls in Alphabet stock are able to stage a comeback and drive Alphabet stock to a new high.
• In our analysis, Alphabet's jaw- dropping capital spend affirms what we have been sharing with you since 2022.  Our call since 2022 has been that AI is real and a fortune is to be made all the way to 2030.  However, it will not be in a straight line, and at times it will be treacherous.  Money is to be made from both the long and short sides as many companies get disrupted.  Investors will need expert guidance.  
• In the Morning Capsule before the stock market opened on Monday, we shared with you that market structures in stocks, gold, silver, and bitcoin had become unstable.  So far, that call has proven spot on.  Market structures continue to be unstable:  
  • Last night, silver dropped 15% in a matter of seconds due to margin calls in China.
  • Margin calls in China also hit gold.
  • Expect the momo crowd in the U.S. that has been aggressively buying SPDR Gold Trust (NYSE:GLD), iShares Silver Trust (NYSE:SLV), VanEck Gold Miners ETF (NYSE:GDX), and Global X Silver Miners ETF (NYSE:SIL) to be hit with margin calls.
  • Bitcoin took another leg down when Treasury Secretary Bessent disappointed bitcoin promoters by saying he did not have the authority to bailout bitcoin. It was followed with more disappointment when Bessent said the government cannot tell banks to bailout bitcoin.  Margin calls on bitcoin continue.
  • In the U.S., the holders of bitcoin ETFs such as iShares Bitcoin Trust ETF (NASDAQ:IBIT), ProShares Bitcoin ETF (NYSE:BITO), Fidelity Wise Origin Bitcoin Fund (BATS:FBTC), and Grayscale Bitcoin Trust ETF (NYSE:GBTC) are also the holders of silver ETF SLV and speculative tech stocks.  Expect many such accounts to get margin calls.
• In our analysis, the two main reasons behind the instability are:
  • Wall Street's positioning
  • Momo crowd's excessive use of leverage
• It is not only to the downside.  Prudent investors need to keep in mind that due to the frequent negative gamma positioning of market makers, if any of these markets start going up, the move will be amplified to the upside.
• Jobless claims unexpectedly increased.  Initial jobless claims came at 231K vs. 210K consensus.  In our analysis, the rise in jobless claims is temporary due to the extreme cold.
• In noteworthy news, Hims & Hers Health Inc (NYSE:HIMS) will start selling a $49 per month copycat version of Novo Nordisk A/S (NYSE:NVO) weight loss drug Wegovy.  It is not clear how the government will enforce intellectual property laws here.

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks.  For this reason, it is important to pay attention to early money flows in the Mag 7 stocks on a daily basis. 

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

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

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 (NYSE:USO).

Bitcoin

Bitcoin (CRYPTO: BTC) is seeing selling.  Bitcoin is under $70K as of this writing.

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.

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