Micron Stock Is a Canary in a Coal Mine for Chinese Trade

So last night the U.S. imposed additional tariffs on China and the world didn’t stop rotating. We are still awaiting China’s retaliation, so it’s safe to say that investors are on edge and the stock markets are suffering from these geopolitical headlines. Fundamentals are hostage until this lunacy ends and the leaders give us clarity on their long term intentions.

Micron stock faces nearer-term pressure

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For the last few years and through headline trading periods, the chip sector often leads equity markets up and down. This time it’s exaggerated because a lot of them have ties with China.

And this affects some chip companies more than others. Micron (NYSE:MU) is the poster-child for this, as 40% of its business has China exposure.

While the high-profile chip companies like Advanced Micro Devices (NASDAQ:AMD), Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA) hog the headlines, MU is perhaps the best canary in the coal mine for the sector, if not the whole market. When MU trades in a trend, it often drags all equities with it.

Micron Stock, Looking Forward

Although it sounds strange, there is logic to it. Micron services the back end of our technology, so if there is demand on its products and services then the whole sector is ramping up. Unfortunately, the opposite is true so if the experts see build up of inventory then they extrapolate that MU sales are falling and it will soon experience a crimp in margin due to pricing issues.

So where are we now in that cycle? My thesis is that the macroeconomic environment is still healthy and favors the bullish scenario than a sustained correction, so whatever is ailing MU stock this month is likely to pass.

So this leaves me to find entry points based on potential support levels. For Micron stock, this is relatively easy given its valuation.

Historically, Wall Street does not respect the upside potential of Micron, so it currently sells at a 3.7 price to earnings ratio. This is on the past 12 months so it’s on actual results, not speculation. Yet, the theory is that this is a value trap.

This is fine with me since the trap also halts the free fall and that is how bottoms form. No, I can’t pick the absolute bottom in MU but I can definitely tell it’s close. So I can start a position long to catch the next recovery swing high.

This would be even easier to do with options. Instead of buying all the shares outright here and put all my allocation at risk with no buffer, I can sell a portion in puts to generate income. This would give me a 10% buffer and would mean that I left room for error.

This is important, since I recognize that Micron has big exposure to China and we are in the throes of a fierce tariff war with headlines coming out today. While eventually the two nations will settle their differences, for now there is potential threat and bulls need to recognize it.

In fact, this is where the shorter term technical charts can help as there are important lines to know above and below current levels.

Micron stock has support through the $36-per-share zone. This has been a pivot point for over five years, so bulls and bears will fight it out hard, thereby creating congestion which in this case is support. These are not hard lines in the sand but rather rubber bands. Also the unfortunate December correction also creates an even stronger support below that through those December lows.

On the upside, MU has resistance through $40.50 and $43.30 per share. But those can also serve as catalysts for more upside to target $50 which was a major September ledge.

The bottom line is that Micron stock is beaten down on headlines more than its fundamentals deserve. So with time, if the stock market is rising, then so is MU. If long, I stay long. There is the potential for a rebound trade from around here.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2019/05/micron-stock-is-a-canary-in-a-coal-mine-for-chinese-trade/.

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