When Good Earnings Still Send Stocks Lower: What It May Mean

Key Concepts

• Puts: Options contracts that give the buyer the right, but not the obligation, to sell an asset at a specified price on or before a certain date. Used to profit from anticipated price declines.
• Implied Volatility (IV): A measure of the market's expectation of future price fluctuations of an asset. Higher IV suggests greater uncertainty and potentially larger price swings.
• Hyperscalers: Companies that build and operate large-scale data centers to provide cloud computing services (e.g., Amazon, Microsoft, Google).
• BITI: ProShares Short Bitcoin ETF – an exchange-traded fund designed to deliver the daily inverse (opposite) of the return of Bitcoin.
• Leveraged ETF (e.g., SOXL): An exchange-traded fund that uses financial derivatives and debt to amplify the returns of an underlying index.
• Charting Patterns: Recognizable formations on price charts that traders use to identify potential trading opportunities (e.g., symmetric triangles, breakouts, support/resistance zones).
• Short Selling: The practice of selling shares that have been borrowed, with the expectation that the price will fall, allowing the seller to repurchase them at a lower price and profit.

Market Observations and Trading Activity – A Review of Recent Positions

The speaker details a series of short-term trading experiments and observations made on the market, primarily focusing on semiconductor stocks, Bitcoin, and related ETFs. The overall tone is cautious, emphasizing profit-taking and risk management despite identifying potential downside opportunities.

Nvidia (NVDA) – A Cautionary Tale

The speaker initially considered taking a bearish position on Nvidia, purchasing $200 puts expiring Friday (the 27th). However, the puts doubled in price overnight, demonstrating significant volatility even with high implied volatility. Despite this missed opportunity, the speaker maintains a bearish outlook, noting that a 20% gain would only bring Nvidia back to its high from last July, despite positive earnings reports. A potential scenario is outlined where Nvidia could fall 80% if hyperscalers face funding issues. The speaker references the adage, “if something is supposed to rise and it falls, sell it,” suggesting a potential reversal in sentiment.

Semiconductor Sector – Broad Weakness

The speaker observes weakness across the semiconductor sector. The SMH ETF (a broad semiconductor ETF) is down, as is SOXL (a leveraged semiconductor ETF), both reflecting Nvidia’s decline. However, the speaker notes a “sticky” quality to the tech sector, illustrated by ARKK (Kathy Wood’s ETF), which is resisting a significant breakdown despite broader market weakness. The speaker describes ARKK’s behavior as “hoofy” – pushing back into its pattern instead of breaking down.

Bitcoin (BTC) – Profit Taking and Caution

The speaker engaged in short-term trading of Bitcoin using BITI (ProShares Short Bitcoin ETF). They initially sold BITI and profited when Bitcoin rose, then re-entered a short position and again took profits. Despite a bearish outlook on Bitcoin, the speaker prioritizes protecting profits, stating, “I’m going to be a wimp about it.” The speaker acknowledges the possibility of being wrong and expresses a desire to be proven incorrect, but remains out of the position due to a lack of desired chart breakdown.

Individual Stock Observations – Short Positions and Potential Trades

Several individual stock positions are discussed:

• Broadcom (AVGO): Down almost 5%, showing a promising pattern below support.
• AMD: Reshorted yesterday and is performing well, falling both yesterday and today. The speaker’s stop-loss is tight. The initial reluctance to short was due to a gap up, but the opportunity was taken yesterday.
• Dell (DELL): A more modest short position with June puts. The speaker acknowledges the risk of missing a potential rally but highlights a good pattern that hasn’t yet broken down. Dell’s earnings announcement after the close is a key event to watch.
• SGHC, AX, and another unnamed stock: The speaker has reduced their “cuteness” (risk-taking) in these positions.
• IMN RO (Monroe): Down 1.3%.
• Micron (MU): Down in sympathy with other semiconductor stocks, approaching a potential breakdown of a symmetric triangle.

Technical Analysis & Charting Patterns

Throughout the discussion, the speaker frequently references charting patterns and technical levels. Key terms include:

• Breakout: A price movement that exceeds a defined resistance level.
• Support/Resistance Zones: Price levels where a stock has historically found buying (support) or selling (resistance) pressure.
• Symmetric Triangle: A chart pattern characterized by converging trendlines, suggesting a potential breakout or breakdown.
• Gap Up: A significant price increase from one trading day to the next, leaving a “gap” in the price chart.

Data and Statistics

• Nvidia would require a 20% gain to reach its previous high from last July.
• Bitcoin futures are down approximately $1300.
• Broadcom (AVGO) is down almost 5%.
• AMD is down significantly, falling both yesterday and today.
• IMN RO (Monroe) is down 1.3%.

Synthesis & Conclusion

The speaker’s commentary provides a snapshot of a volatile market environment, particularly within the semiconductor sector. The overarching theme is cautious optimism, with a focus on identifying potential downside risks while actively managing positions to protect profits. The speaker demonstrates a disciplined approach to trading, prioritizing risk management and acknowledging the possibility of being wrong. The emphasis on charting patterns and technical analysis highlights a reliance on visual cues to inform trading decisions. The speaker’s willingness to take profits, even on potentially lucrative trades, underscores a pragmatic and risk-averse strategy.