Time To Start Deploying Cash In The AI Trade?

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60% Of Capitulation Criteria Met

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

Note the following:

li>Semiconductors reflect the AI trade, and SOXL is the momo crowd's favorite./li> li>The chart shows SOXL has fallen below the low band of zone 3 (support). On the surface, the break below support is a negative. However, investors need to look at the breakdown in conjunction with RSI and the volume./li> li>The chart shows divergence in RSI since RSI hit the absolute low of 0.0. In plain English this means that RSI has gone higher as the price of SOXL has gone lower. This is a positive./li> li>The chart shows heavy volume yesterday when SOXL fell below the low band of zone 3. The heavy volume indicates conviction in selling. On the surface, this seems negative. However, investors also need to look at it in the context of margin calls that were hitting momo crowd accounts yesterday and heavy short selling that our algorithms picked up. The correct interpretation in the proper context is that immediate selling due to forced liquidations in momo crowd accounts may not be as intense today as it was yesterday. Short selling again may not be as intense as it was yesterday. The net result is that heavy volume in this context is positive, not negative as it seems on the surface./li> li>strong>In our analysis, heavy short selling yesterday increases the probability of a short squeeze that can lead the stock market higher. Here is the highest probability scenario sequence:

li>Short sellers will likely first push the pedal hard to drive the market lower. /li> li>If the market starts going higher, short sellers are likely to panic and buy to cover. /li> li>Once short sellers begin to cover, it will drive the market even higher. Those who follow traditional technical analysis see the momentum and jump in, driving the market even higher. /li> /ul> /li> li>The foregoing scenario may play out over a few days. Today is a Friday. Historically, short squeezes start on Fridays. /li> li>There is no guarantee that the above scenario will play out. The point is the above scenario is the highest probability scenario at this time. /li> li>In our analysis, about 60% of the criteria for capitulation in high momentum AI stocks have been met. /li> li>It is worth a reminder that you do not get to invest and trade in the market you wish you had; you get to invest and trade in the market you are given. Certainly, it would be easier if 80% – 90% of capitulation criteria was met so that a signal to back up the truck and buy stocks./li> li>In our analysis, the best practical way to handle the market as it is now is to slowly deploy cash in the AI trade. /li> li>The risks outlined in yesterday’s Morning Capsule regarding Iran, the midterm elections, and President Putin’s success should not be underestimated.

li>The headline of today’s Wall Street Journal reads "Iran Threatens Wider Strikes on Economic and Civilian Targets if U.S. Attacks."/li> li>we wrote yesterday: /li> /ul> /li>

Iran’s Islamic Revolutionary Guard Corps (IRGC) spokesman Hossein Mohebi is saying that IRGC is shifting to an "offensive and asymmetrical" defense doctrine. In plain English this means that Iran will proactively attack U.S. bases, other countries, and oil tankers in its defense./p>

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)/a>, NVIDIA Corp (NASDAQ:NVDA)/a>, and Tesla Inc (NASDAQ:TSLA)/a>.

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

In the early trade, money flows are negative 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 (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.

Deploy Cash

High momentum AI stocks have dipped 30% – 60%. Now is the time to start slowly deploying cash in the AI trade. The tentative plan is to also take profits on hedges or reduce hedges in due course as new data comes in. The tentative plan is to continue reducing cash, assuming the new data is supportive.

Having said that markets are extremely volatile and the risks outlined in yesterday’s Morning Capsule have not gone away. As a result, investors should also be prepared for about a 30% probability at this time that the plan to deploy cash and reduce hedges may need to be reversed.

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 for our free forever Generate Wealth Newsletter.

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