Why I would not invest a dollar in AI today

AI is the most dangerous investment in the market right now.

Investment, not trade. Those are two different worlds and the AI tape today is screaming the difference.

The semiconductor ETF, SMH, is the cleanest AI proxy out there. It has not had a real pullback in months. None.

The kind of move where you go "okay, the market took a breath" has not happened. The chart goes up, retail buys more calls, the chart goes up.

Here is what is happening underneath that chart.

A retail trader buys a call on an AI name. The professional on the other side, the market maker, sells that call.

To hedge the short call, the market maker has to go buy shares of the underlying stock. That stock-buying pushes the price up.

The price going up makes more retail traders buy more calls. The market maker hedges those by buying more stock. The price goes up again.

What you are looking at is not a fundamental rally but a mechanical feedback loop driven by retail call buying and market maker hedging. It can run a long time. You do not want to be invested when it ends.

Goldman has been waving the same flag. 

CEO David Solomon said publicly that a lot of capital deployed in AI is not going to deliver returns. Their research published this morning warns the AI buildout is inflationary right now and is adding meaningful pressure to consumer prices.

The professionals on the other side of the retail call buying are hedging, not buying.

The risk-reward to put new investment money into AI at these levels is one of the worst I have seen in years.

Trade this market all you want. Just have an exit ready, because being invested when this loop breaks is going to hurt.

It is what it is. 

Markets can run longer than makes sense, and they often do. Know which side of the trade you are on, and have an exit before you need one.

To your success,

Don Kaufman

P.S. The next two weeks of earnings are going to test this thesis hard. Last week, I went 4-for-4 on my earnings trades, triple-digit winners in 24-48 hours. If you want this week’s earnings trades, click here to get started.