Why Investors May Be Getting The Blue Wave Trade Wrong; Iran Remains The Wild Card

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Look Ahead – Iran Is The Key

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

Note the following:

li>As a reminder, our report is politically agnostic. /li> li>Semiconductors reflect the AI trade, and SOXL is the momo crowd's favorite./li> li>The chart shows SOXL is consolidating below the low band of zone 3 (resistance) after the Blue Wave in the midterm election./li> li>The intraday price action is insightful.

li>After the market close yesterday, SOXL staged a major rally, trading as high as $78.36. As a reference, SOXL is trading at $70.20 as of this writing in the premarket./li> li>The rally in SOXL was due to Advanced Micro Devices Inc (AMD) reporting earnings higher than the whisper numbers and guiding significantly higher than prior projections.  The consensus for AMD earnings were $1.94, and whisper numbers were around $2.01.  AMD reported $2.09.  AMD is seeing FY27 revenue growth of over 80%.  AMD earnings are especially important after competitor Intel Corp’s (INTC) weak report./li> li>In the premarket this morning, SOXL has not only given up all of its gain, it is trading down 3.37% from yesterday’s close./li> li>AMD traded as high as $530.38 on earnings. In the premarket this morning, AMD has given up most of the gain and is now trading at $486.10./li> /ul> /li> li>RSI on the chart shows that the bullish divergence has been negated by the Blue Wave./li> li>strong>Momo investors are rushing to sell AI stocks and rushing to buy stocks perceived as winners from the Blue Wave.  Here are the key points from our analysis:

li>The momo crowd is making a mistake reacting instead of analyzing. The momo crowd is ignoring the fact that President Trump is still president and Democrats controlling Congress is not a guarantee they can deliver everything investors are betting on./li> li>The momo crowd is aggressively selling data center stocks on Texas turning blue. The momo crowd is missing an important point. Republican Governor Abbott had already halted new data center permits. If Texas makes it harder to build new facilities, existing data centers with secured electricity could become significantly more valuable. The momo crowd is selling data center stocks without distinguishing between existing facilities and projects that may never get built. If new data centers cannot be built in Texas, much of that investment will flow to other states. /li> li>NVIDIA Corp (NVDA), AMD, Intel, and Micron Technology Inc (MU) do not need their chips to end up in Texas. What matters is how much AI computing capacity gets built./li> li>Solar and wind stocks are running up as if energy policies have changed, but they have not. There is no guarantee the newly elected Democratic Congress will change energy policies. Further, data centers need reliable electricity around the clock. Wind and solar alone cannot provide that without storage or other backup. The momo crowd is betting on a political shift instead of looking at the economics./li> li>Hospital and health insurance stocks are jumping on expectations of more government healthcare spending. The momo crowd is ignoring the fact that the national debt is already over $40T, and changes in government healthcare spending would need the support of the Trump administration. /li> li>The momo crowd is selling defense stocks indiscriminately. President Trump's proposed $1.5T defense budget may face opposition, but the world has not become safer because Democrats won Congress. Iran remains the key with the possibility of renewed military action. The need for advanced weapons, missile defense, and replenishing military stockpiles is not going away. /li> li>Elon Musk spent hundreds of millions of dollars supporting Republicans, and now the Blue Wave is putting pressure on stocks associated with Musk.  Prudent investors know to separate their politics from their investments.  Space Exploration Technologies Corp (SPCX) and Tesla Inc (TSLA) have announced an initial $16.8T Texas semiconductor project, and SpaceXAI has explored building major data centers in Texas.  Political headwinds may delay some projects, but they do not automatically destroy the long term economic value./li> /ul> /li> li>In our analysis, the biggest winners from the Blue Wave are unlikely to be the stocks the momo crowd is buying today.  Some of the stocks being sold could actually benefit as the consequences of the election play out.  History shows following the crowd on political headlines without understanding the economics is a good way to lose money. /li> li>strong>In our analysis, the next big question for prudent investors is how will the Blue Wave change President Trump's decision on Iran.  Here are the key points:

li>There are reports of celebrations in Iran on the Democratic victory in the U.S./li> li>Iran may mistakenly believe that the Democratic victory has weakened President Trump and strengthened Iran’s negotiating hand. /li> li>President Trump no longer has to worry about the midterm elections. The political constraint that may have held him back before the election is now gone. /li> li>President Trump is still commander-in-chief, and the new Democratic Congress does not take office until January 3. President Trump has considerable time to act before then. /li> li>The Blue Wave cuts both ways. President Trump may want a deal to bring down oil prices. A credible deal could send oil lower and stocks higher. On the other hand, President Trump may decide that military escalation is the better way to force Iran to make concessions. Major new strikes could send oil soaring and stocks plunging./li> /ul> /li> li>If it was not for the pending Iran issue, our call today would have been to deploy cash and reduce hedges; This would have been the case not because of the Democratic victory but because the overhang of the election has lifted.  However, no change is being made at this time due to the uncertainty related to Iran./li> li>At this time, it is worth a reminder to prudent investors of our principle: Always give priority to return of capital over return on capital.  There is truth to the old saying that it is not how much money you make, it is how much money you keep.  /li> li>ADP is the largest private payroll processor in the country. ADP uses its data to provide a glimpse of the official jobs report that will be released on Friday at 8:30am ET. ADP employment change came at 86K vs. 75K consensus./li>

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.com, Inc. (NASDAQ:AMZN)/a>, Microsoft Corp (NASDAQ:MSFT)/a>, Alphabet Inc Class C (NASDAQ:GOOG)/a>, Meta Platforms Inc (NASDAQ:META)/a>, and Apple Inc (NASDAQ:AAPL)/a>.

In the early trade, money flows are negative in Nvidia (NASDAQ:NVDA)/a> and Tesla (NASDAQ:TSLA)/a>.

In the early trade, money flows are positive in SPDR S&P 500 ETF Trust (NYSE:SPY)/a> and Invesco QQQ Trust Series 1 (NASDAQ:QQQ)/a>.

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)/a>.

Oil

API crude inventories came at a draw of 5.267M barrels vs. a consensus of a build of 2.1M barrels.

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. Most recently, we correctly called the rally from recent stock market lows and the 2026 semiconductor decline before a 25% drop in the Semiconductor ETF (SMH). In gold, we bought at an average price near $1,105, close to cycle lows, and took partial profits near $5,400, close to cycle highs. Please click here to get our free forever Generate Wealth Newsletter.

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