Semiconductor Rally

Please click here for an enlarged chart of Direxion Daily Semiconductor Bull 3X ETF (NYSE:SOXL).

Note the following:

  • Semiconductors are the leading sector that drove the stock market higher.  SOXL is the momo crowd’s favorite semiconductor ETF.
  • The chart shows a massive rally in semiconductors yesterday.  In yesterday’s Morning Capsule, we wrote:

The chart shows selling in SOXL yesterday was on heavy volume.  The reason for the heavy volume was that many momo crowd accounts were hit with margin calls and were forcibly liquidated.

  • The heavy volume shown on the chart the day before yesterday resulted in exhaustion of selling.  The massive rally yesterday shown on the chart was the result of the overhang of forced liquidations of momo crowd accounts lifted.  Yesterday, we wrote:

RSI on the chart shows SOXL is moving out of the oversold zone.  This sets SOXL up for a potential bounce unless there are more margin calls and more momo accounts are liquidated.

  • The last time a similar rally was seen was in 2001 after the internet bubble crashed.  Here is the key question for investors: Will this semiconductor rally be sustained or peter out?  The answer will come down to if momo accounts that have been on the verge of liquidation have already been liquidated or if more liquidations are still ahead.  In our analysis, the big rally, at a minimum, has postponed more liquidations. 
  • The chart shows that there is more aggressive buying in semiconductors this morning.
  • A high profile hedge fund in which all publicly traded securities were sold to Citadel, essentially a liquidation, was ironically named Situational Awareness – the fund does not appear to have awareness of the risk it was taking by buying momentum AI stocks on 4:1 leverage.  The fund was run by 25 year old Leopold Aschenbrenner who had amassed $45B of assets.  When the momentum turned, Situational Awareness lost 67% in July.  Aschenbrenner had no prior professional investing experience before starting the fund two years ago. 
  • In addition to the U.S., a large number of momo accounts were forcibly liquidated in South Korea.  To deal with the stock market drop, the South Korean government announced a variety of measures including their sovereign wealth fund injecting $13.9B in AI.  As the overhang of forced liquidations lifted, the Kospi index in South Korea ran up 18% for the day.  Samsung Electronics Co Ltd (OTCPK:SSNLF) was up 27% for the day and SK Hynix Inc – ADR (NASDAQ:SKHY) jumped 30%.  It was the biggest one day jump in SK Hynix stock since the company went public in the 1990’s.  
  • Amazon.com, Inc. (NASDAQ:AMZN) jumped after earnings.  Many less knowledgeable retail investors did not realize that the reported income included investment gains and acted on the headline.  Many Wall Street algos also appear to have acted on the headline.  Here are the details:
    • Amazon reported EPS of $5.75 vs. $1.82 consensus.
    • Amazon reported revenue of $200.6B vs. $196.43B consensus.
    • AWS sales were $42.23B vs. $30.87B last year.  This was the fastest growth for AWS in 18 quarters.  AWS is the computing arm of Amazon.
    • Amazon will spend $220B on capex.
  • The stock market got excited about Amazon when Amazon said that AWS could become a $1T business.  This $1T forecast brought more buying into semiconductors after hours.
  • Apple Inc (NASDAQ:AAPL) had run up going into earnings for two reasons:
    • Whisper numbers continued to move up.
    • The narrative changed from Apple being a laggard in AI to a good thing that Apple was not spending capex on AI.
  • Apple earnings disappointed. Here are the details:
    • Apple reported earnings of $2.02 vs. $1.89 consensus.  Whisper numbers were over $2.10.
    • Apple reported revenue of $109.4B vs. $108.96B consensus.  Whisper numbers were over $111B.
    • For Q4 Apple sees revenue of $111.7B – $113.7B vs. $114.95B consensus.
  • The issue with Apple is it is facing supply constraints.  Apple’s supply constraints brought in more buying in semiconductors after hours.
  • Investors need to be discerning as AI can be a double edge sword.  Reddit Inc (NYSE:RDDT) is a perfect example.  RDDT reported earnings better than consensus and whisper numbers, but the stock is down about 15% as of this writing in the premarket.  Reddit is benefiting from payments from Alphabet Inc Class A (NASDAQ:GOOGL) and Alphabet Inc Class C (NASDAQ:GOOG) for using Reddit data to train its AI.  On the other hand, AI is answering people’s questions.  As such, people do not need to go to Reddit to get answers.  Reddit is seeing a sequential decline in daily average users.
  • There have been rumors that Tesla Inc (NASDAQ:TSLA) is looking at separating its China business to prepare for a Tesla merger with Space Exploration Technologies Corp (NASDAQ:SPCX).  Elon Musk is denying the rumors.
  • Today is a Friday.  Short sellers will be covering to reduce risk ahead of the weekend, and longs will be selling to reduce risk from adverse developments in the Middle East over the weekend.  As a result of these two crosscurrents, whichever way the stock market starts going, Wall Street machines will jump in the same direction, exaggerating the move.
  • The yield on U.S. Treasuries is stubbornly staying elevated, currently at 5.228% as of this writing, on concerns that the Fed, under new Chair Warsh, has fallen behind the curve.

Japan

Japan, the U.S., and South Korea intervened in forex markets to support the yen.  To cement the gains in the yen, the Bank of Japan (BOJ) needed to raise interest rates, but BOJ decided to leave its policy rate unchanged at 1%.  Prudent investors pay attention to Japan because of the carry trade.  In the carry trade, funds have borrowed hundreds of billions of dollars in Japan to invest in the U.S. primarily in the AI trade.

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 positive in Amazon (AMZN), NVIDIA Corp (NASDAQ:NVDA), Microsoft (MSFT), Alphabet (GOOG), Meta Platforms Inc (NASDAQ:META), and Tesla (TSLA).

In the early trade, money flows are negative in Apple (AAPL).

In the early trade, money flows are positive 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 (NYSE:GLD).  The most popular ETF for silver is iShares Silver Trust (NYSE:SLV).  The most popular ETF for oil is United States Oil ETF (NYSE:USO).

Bitcoin

Bitcoin (CRYPTO:BTC) is range bound.

What To Do Now

Consider continuing to hold good, very long term, existing positions and add tactical positions based on signals.

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.