Nvidia Earnings Will Test AI Rally

Nvidia Earnings Ahead

Please click here for an enlarged chart of NVIDIA Corp NVDA.

Note the following:

• This article is about the big picture, not an individual stock. The chart of NVDA is being used to illustrate the point.
• The chart shows that even after the large move up in the stock market after Fed Chair Powell hinted a rate cut is ahead, NVDA stock was not able to enter zone 1 (resistance).
• Volume on the chart shows that the move up on Friday was not on heavy volume. This indicates a lack of conviction ahead of earnings.
• The chart shows the trendline has been broken.
• RSI on the chart shows NVDA stock is no longer oversold.
• Nvidia reports earnings after the regular session close on Wednesday.
• Whisper numbers for Nvidia earnings are higher than the consensus numbers. Whisper numbers are the numbers analysts privately share with their best clients. Whisper numbers are often different from consensus numbers published by the same analysts for public consumption. Analysts typically provide whisper numbers only to their best clients, and not the public.
• In our analysis, Nvidia earnings will be a test of the AI rally.
• Intel Corp INTC has run up on the news that the U.S. government is taking about a 10% stake. The momo crowd is oblivious, but in our analysis, this is negative for Intel. The reason is Intel was previously going to get a free infusion from prior government programs but now Intel is paying for it with about 10% of the company. This is a massive dilution for existing shareholders. We have given a signal to take more partial profits on INTC stock, taking advantage of the strength.
• The stock market was euphoric on Friday after Powell hinted at a rate cut in September.

In our analysis, there is now a 95% rate cut in September. Only if the September inflation data is significantly worse than expectations, the rate cut may not happen.

• Prudent investors should note the following key points:
  • There is no clarity if the September rate cut will be 25 bps or 50 bps.
  • There is no clarity as to how many rate cuts there will be in this cycle.
  • The stock market is discounting five rate cuts going into next year.
  • Inflation continues to run higher than the Fed's 2% target..

Money Flowing Into Chinese Stocks

Money continues to move into Chinese stocks as investors perceive that China has gotten the upper hand in trade negotiations with the U.S. Hong Kong’s Hang Seng reached its highest level in nearly four years, and China’s Shanghai Composite hit the highest level since 2015.

As full disclosure, mainland China ETF Xtrackers Hvst CSI 300 China A Shs ETF Class A ASHR and Hong Kong ETF iShares China Large-Cap ETF FXI are in our portfolio.

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).

Bitcoin

Bitcoin BTC/USD is seeing selling. It appears bitcoin whales took advantage of the euphoria among retail investors caused by Powell's speech to sell bitcoin into the strength.

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.