Nvidia And AMD's Extraordinary Deal For China Access As Inflation Data Looms

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

AI Chip Deal

Note the following:

• This article is about the big picture, not an individual stock. The chart of NVDA stock is being used to illustrate the point.
• The chart shows the run up in NVDA stock since the lows in April.
• The chart shows our buy signal and signal to take profits on hedges in April. As full disclosure, NVDA is in our portfolio.
• The chart shows RSI divergence. In plain English, this means that the internal momentum of NVDA stock is slowing. This is a negative.
• In an extraordinary deal, the White House is essentially partnering with Nvidia and Advanced Micro Devices (AMD) to help China with AI.
  • The U.S. will receive 15% of sales of AI chips to China.
  • In return, Nvidia will get an export license for H20 AI chips, and AMD will get an export license for MI308 AI chips.
  • Exports of H20 and MI308 chips were previously stopped in April. The purpose was to slow down AI development in China.
• In our analysis, this is a short term tactical win but of concern in the long term. China is the U.S.'s main strategic rival. China intends to replace the U.S. as the world's superpower. In this rivalry, the AI capabilities of each country will play a major role:
  • Shipping H20 and MI308 chips to China will enable China to progress faster.
  • In theory, these chips are meant for inference, and not for training large language AI models. However, in our analysis, China can use these chips to train large language models, albeit at a slower pace.
  • President Trump campaigned that he was the right person to stop China from replacing the U.S. as the world's superpower. In our analysis, this is one of several moves over the last couple of months that are short term tactical wins for the U.S but raise concerns about the long term.
  • The argument in favor of the deal is that if the U.S. were not to supply these chips to China, China will simply accelerate its own development. The counter argument is China is already moving at breakneck speed to increase its capabilities in AI at the fastest possible rate.
  • It is important for investors to get ahead of the curve and prepare in advance for scenarios that are developing.
  • There are significant long term implications of this move for investors. If there are more similar moves, we will be making significant changes to long term investments.
• Inflation data is ahead this week:
  • Consumer Price Index (CPI) will be released tomorrow at 8:30am ET. The consensus for headline CPI is 0.2% and 0.3% for core CPI.
  • Producer Price Index (PPI) will be released Thursday at 8:30am ET. The consensus for headline PPI is 0.2% and 0.2% for core PPI.
• In our analysis, over the last few months, the cost of tariffs has not shown up in inflation data because suppliers abroad and U.S. businesses have been absorbing the cost. Sooner or later, some of this cost will show up in the inflation data. Will it be this week? Prudent investors should note that the stock market is not prepared for tariff costs showing up in inflation data.
• In our analysis, at this time of extreme positive sentiment in the stock market, the market is still discounting a tariff rate of about only 10%. The reality is that so far, tariffs are averaging about 19%. Although oblivious now, sooner or later, the stock market will wake up to this new reality.
• Investors should keep in mind that September is not very far away. September tends to be a weak month. Stock market crashes tend to happen in October.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Amazon.com, Inc. (AMZN), Meta Platforms Inc (META), Microsoft Corp (MSFT), and Tesla Inc (TSLA).

In the early trade, money flows are negative in Apple Inc (AAPL), Alphabet Inc Class C (GOOG), and Nvidia (NVDA).

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

Gold is being sold on the prospect that the U.S. may not impose tariffs on gold.

Oil

Oil is moving on speculation about the Trump Putin meeting that is set to take place on August 15 in Alaska. Russia is a major oil producer. The speculation is that President Trump will agree to removing sanctions on Russian oil.

Bitcoin

Bitcoin is seeing buying.

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.

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.