The semiconductor trade has been a tricky one in 2019. For most of last year, the sector had been under fire, but at least this year we have many big winners. Advanced Micro Devices (NASDAQ:AMD) is one. They reported last night and it’s getting a lot of love this morning. It also helps that Apple (NASDAQ:AAPL) and Boeing (NYSE:BA) stocks are also doing well this morning.
Coming into the earnings I was nervous about the short term reaction that AMD could suffer given what we saw happen to Nvidia (NASDAQ:NVDA) on Monday. On the dip, I wrote about avoiding NVDA since it was two strikes in a row for management and that more pain could be coming.
Today I am suggesting that the AMD rip is the start of more gains to come. Luckily, even though I was nervous about the reaction to earnings, I took a small bullish bet favorable toward the AMD earnings outcome. I sold a credit put spreads to finance buying a debit call calendar. This will pay today.
If you don’t know options, don’t worry. This has nothing to do with today’s setup. It merely says that I come into today with profits in my pocket so I can afford to be brave and chase. Before you label me a perma-bull for AMD, I assure you that I am not. I have also suggesting shorting the stock when it ran to $30 per share. Those trades also paid well.
My thesis today is simple — I am betting that equity markets in general will rally this year, and AMD stock will rally with them. The fundamentals in it are not cheap. This is a stock that seems bloated from the traditional sense, but the story is long term.
We now need technology for every aspect of our lives and under the leadership of Lisa Su, AMD is positioned to grow with the need for tech for decades to come. In other words, for now I focus on growth and valuation is not a concern.
Other Positives for AMD Stock
I have other, shorter-term reasons to believe that AMD is headed higher. Technically, the stock looks frisky even after this spike. This is a ultra-momentum stock so it runs fast in either direction. This also makes it difficult to trade.
Last year the markets struggled and suffered the first loss since the financial debacle — but not AMD. It was up 50% while the rest struggled. This year it shares the spotlight with other like Xilinx (NASDAQ:XLNX). They are up 15% and 30% year-to-date. Compare that to the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) which is only up about 7%.
The technical opportunity for Advanced Micro Devices here comes from the 12-month price range when compared to 2019. Coming into this year, AMD stock traded in a huge range. Conversely, this year it has been confined between $19 per share and $22. Whenever you have a tightly defined range, any breach of either side usually carries more momentum in that direction.
This is a fancy way of saying that there is another potential breakout coming. If Advanced Micro Devices stock can rise above $22, it could trigger a buy signal that would invite more buyers into chasing it.
The size of the move could be another $4 from the neckline. So $26 would then be within range, but with potential resistance at $23.50, where it failed in a big way back in early December.
While the technical reason I cite here sounds short-term and technical, it fits with the overall longer-term fundamental reason to own the shares, so why not start the bet now? If I am long, I stay long and perhaps add a little to my position. If I am starting a new AMD position then I may want to start now and leave some room to add.
Why the caution? We still have to contend with several deadlines looming on the tariff and political fronts. Politicians often have a way of messing up good things. For those who know how to trade options, I’d buy half the shares and commit to buying the rest by selling puts below. This reduces the out-of-pocket expense and gets me long AMD stock now but with room for error. If the stock falls then I’d own the full shares at a discounted entry point.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
