Semiconductors Make New Highs on Taiwan Semi Earnings

The VanEck Semiconductor ETF (SMH) just hit a fresh all-time high following strong earnings from Taiwan Semiconductor Manufacturing Co. (TSM). But here's the thing: while the price keeps climbing, something interesting is happening beneath the surface.

The technical picture tells a story that goes beyond the headline number. First, the move is extended way beyond the first support zone, meaning there's a lot of air underneath current prices. Second, the Relative Strength Index is showing divergence, which basically means semiconductors are losing internal momentum even as aggressive buying pushes prices higher. Third, volume during this latest rally hasn't been particularly impressive.

And here's where it gets interesting: the majority of buying in semiconductors so far in 2026 is coming from the momentum crowd, not institutional investors. Smart money isn't buying semiconductors at all-time highs, and the reason is pretty straightforward. They know the history. Semiconductor stocks always overshoot, then experience vicious pullbacks.

Which brings us to the key question for prudent investors: Will this time be different because of AI? Only time will tell, but here's how to think about it. The demand for semiconductors has a very high probability of staying elevated for the rest of 2026 and possibly into 2027. However, stocks are overshooting on momentum crowd buying, which creates a complicated risk-reward setup.

For full disclosure, SMH has the largest allocation in certain portfolios, with long positions from an average of $7.95. The ETF is trading at $402.01 in premarket trading as of this writing. There are also substantial gains on semiconductor stocks like Applied Materials Inc. (AMAT) and NVIDIA Corp. (NVDA) in these portfolios.

Trump's Power Move: Emergency Auction for Grid Capacity

President Trump plans to direct PJM, the nation's largest grid operator, to run an emergency power auction that would essentially force big tech and data center companies to finance new power plants. Under the plan, tech companies would bid for 15-year contracts worth billions of dollars. The aim is to speed up generation and grid hookups, cap auction prices, and limit consumer bill increases tied to AI demand.

The momentum crowd is buying stocks of power generation companies like Constellation Energy Corp. (CEG) and Vistra Corp. (VST) on this news. However, smart money is being prudent and actually trimming power generation stocks. The reason? Institutional investors have large gains on these stocks, and at this time, there isn't clarity on whether President Trump's directive will ultimately benefit power generation stocks or not. Sometimes the best trade is taking profits when you have them.

Silver Goes Parabolic on Short Squeeze

Silver has gone parabolic, driven by a short squeeze. The retail momentum crowd doesn't have access to algorithms that can truly analyze short squeezes. The meme crowd is used to buying on short squeezes as they buy out of emotion and believe in sticking it to the hedge funds. There's significant anecdotal evidence that the retail momentum crowd is going all in on silver at these extraordinarily high prices, which has exacerbated the short squeeze.

Here's the thing: this leg of the short squeeze is showing early signs of ending. Historically, the retail crowd almost always goes all in right near the top. Will this time be different? This time there's an additional complication of China restricting the export of refined silver as of January 1, which adds a fundamental element to what's primarily been a technical move.

Japan Watch: Carry Trade Implications

Japan is important because of its impact on the carry trade in the U.S. No rate hike is expected next week from the Bank of Japan. However, expectations for a rate hike in April are increasing.

In potentially significant news, Japan's Finance Minister Katayama is hinting at a potential intervention in the market in conjunction with the U.S. Treasury. This is worth watching closely given the interconnected nature of global currency markets.

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks, which makes it important to pay attention to early money flows in these names on a daily basis.

In early trading, money flows are positive in Amazon.com, Inc. (AMZN), Alphabet Inc. Class C (GOOG), Nvidia (NVDA), and Tesla Inc. (TSLA).

Money flows are neutral in Meta Platforms Inc. (META) and Microsoft Corp. (MSFT).

Money flows are negative in Apple Inc. (AAPL).

In the broader market, money flows are positive in SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust Series 1 (QQQ).

Following Smart Money in Key ETFs

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 Update

Bitcoin (BTC) is range bound at current levels, lacking clear directional momentum in either direction.

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. This is a practical 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 protection is appropriate for those who are older or conservative. The low band of 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's 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 Considerations

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.

The current environment rewards flexibility and tactical thinking over rigid adherence to traditional asset allocation models. That doesn't mean abandoning your strategy entirely, but it does mean being thoughtful about how you implement it.