Make Or Break for AI Trade–Micron Earnings Ahead; Consumers Spend More Even As Income Drops

This article is about the big picture, not an individual stock. The chart of MU stock is being used to illustrate the point.

The chart shows that leading up to last quarter’s release, MU stock ran into zone 1.

The chart shows that after the last earnings release, MU stock fell 41%. This was in spite of Micron beating earnings consensus by 20%, revenue consensus by 15%, and earnings guidance consensus by 20%.

Trendline 3 on the chart shows that MU stock has been rising since hitting the low in July.

The chart shows that over the last few days, MU stock is consolidating below the low band of zone 1.

RSI on the chart shows MU stock can easily go either way.

Micron will report earnings today after the regular session close.

Micron whisper numbers have steadily been rising.

In our analysis, the probability is very high that Micron will report strong numbers. Prudent investors should watch how MU stock reacts to earnings. Keep in mind that last quarter, immediately after the release of earnings, MU stock rose initially but then fell later. In the process, the momo crowd was sucked in to buy after earnings, near the top. As MU stock proceeded to drop 41%, it hurt the entire AI trade. Typically, momo crowd accounts are not diversified beyond the AI trade and are heavily in call options as well as fully margined. As MU stock fell after last quarter’s earnings report, many momo crowd accounts were hit with margin calls, resulting in forced liquidations and account blowups.

The idea of aggressively buying call options on whatever is moving up is so seductive that the momo crowd has a constant supply of newcomers that replace those whose accounts blow up.

The momo crowd situation is going to become even worse as the momo crowd starts using AI agents. So far, the preliminary data is that the way the momo crowd uses AI agents is amplifying their sheep like behavior. They all go in the same direction, now more aggressively and faster than they could prior to using AI agents.

In our analysis, if MU stock stages sustained breakout above zone 1, the entire AI trade, and in turn the stock market, will likely move up. On the other hand, if MU stock drops, the drop will likely be cushioned by extremely aggressive momo crowd buying. The momo crowd is trained to buy every blip down because they believe stocks are going higher. The momo crowd also buys every blip higher because FOMO kicks in.

Prudent investors should also be mindful that the momo crowd’s behavior is making it difficult for institutions to invest and trade based on deep analysis.

AI valuations continue to rise. OpenAI, the maker of ChatGPT, intends to raise $30B at a valuation of $1.4T. As a reference, the last raise was at a valuation of $852.

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. The just released ADP data is strong. ADP Employment Change came at 90K vs. 58K consensus.

The U.S. economy is 70% consumer based. For this reason, prudent investors pay attention to personal income and personal spending. The data shows that even as consumer income drops, consumers are continuing to increase spending. Clearly, this is not sustainable over the long term. Here are the details:

Personal spending came at 0.9% vs. 0.7% consensus.
Personal income came at 0.2% vs. 0.4% consensus.

PCE is the Fed’s favorite inflation gauge. The Bureau of Economic analysis has changed its calculation for PCE for computer software, legal services, and portfolio management. The expectation has been that the changes would reduce PCE by 0.2%. Inflation came weaker than expected. Here are the details:

Headline PCE came at 0.3% vs. 0.4% consensus.
Core PCE came at 0.2% vs. 0.3% consensus.

GDP data is strong. Here are the details:

Q2 GDP third estimate came at 2.2% vs. 1.5% consensus.
Q2 GDP Deflator third estimate came at 6.4% vs. 6.3% consensus.

In the early trade, there is buying in stocks as yields pull back after release of economic data.

Today is the last day for quarter end window dressing and rebalancing. For details, please see the Morning Capsule from September 28.

KT

Make Or Break for AI Trade–Micron Earnings Ahead; Consumers Spend More Even As Income Drops

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