Bear Put Strategy on AI Chips Aims for 100% ROI Amid Caution

Key Takeaway

• Bearish signals in semiconductor stocks, with Micron (MU) showing trend reversal indicators and a bear put spread strategy aiming for 100% ROI.
• Nvidia's earnings could impact AI-exposed chip stocks; diversification recommended into steady growth companies like Emerson Electric and Eli Lilly.
• Goldman Sachs outlines four AI investment phases, indicating cautious optimism in the sector despite high expectations.

Semiconductor Sector Shift

Recent market observations indicate a potential shift in the semiconductor sector, highlighted by a significant bearish engulfing candle on March 8th on the iShares Semiconductor ETF (SOXX) chart. This pattern, often a precursor to a directional change, suggests a cooling off in the previously bullish sentiment that has buoyed chip stocks like Nvidia, AMD, and Broadcom. Micron Technology Inc. (MU), in particular, has shown several indicators of a possible trend reversal. The Relative Strength Index (RSI) for MU has dipped below 70, a key signal used by traders to identify a shift from overbought conditions to potential bearish momentum. Additionally, MU's price action has begun to form a pattern of lower highs and lower lows, further confirming the downtrend.

Bearish Trade Setup on Micron

In response to these market signals, a specific bearish options strategy, known as a "bear put spread," has been outlined for Micron. This setup involves buying a Micron $121 put with a May 3rd expiry and selling a Micron $120 put for the same expiry date, at a cost of $50. This trade aims for a 100% return on investment if Micron's stock trades at or below the $120 mark by the expiration date. This strategy is designed to capitalize on the anticipated downward movement of MU's stock, with a relatively short time frame of 17 days to expiration, aligning with the observed market indicators.

Nvidia's Earnings and Market Alternatives

As the tech sector braces for Nvidia's upcoming earnings report, the significance of this event cannot be understated. Adam Parker from Trivariate Research points out that robust guidance from Nvidia could reinforce the viability of AI-exposed semiconductor stocks. However, given Nvidia's substantial gains this year and recent slight pullbacks, there's growing concern about potential market corrections. Parker suggests that investors overly reliant on Nvidia consider diversifying into steady growth stocks with low correlation to Nvidia, such as Emerson Electric, Southern Copper, and Eli Lilly, among others. This strategy aims to mitigate risk while maintaining exposure to growth opportunities.

AI Investment Phases and Market Outlook

Goldman Sachs Research provides a comprehensive overview of the investment landscape surrounding artificial intelligence (AI), delineating it into four phases. Nvidia's success epitomizes the first phase, focusing on companies directly involved in AI's initial development. The subsequent phases expand to include companies building AI infrastructure, those incorporating AI into their products for revenue generation, and finally, businesses expected to realize productivity gains from AI integration. Despite the high expectations for AI, current investor optimism, as measured by long-term earnings growth and analyst estimates, remains below the peaks seen during previous tech bubbles. This cautious optimism suggests a balanced market perspective on the transformative potential of AI technology.

Street Views

• Nishant Pant, Founder of TradingExtremes (Bearish on Micron):

  "After being overbought for months, the Nvidia-led tech rally appears to be losing steam... Among the semiconductor stocks, Micron (MU) stands out as a notable example."