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The AMD Stock Rally Has Gotten Way Too Advanced in Front of Earnings

Rich valuations and extended technicals set up ideally for a short in AMD

Shraes of Advanced Micro Devices (NASDAQ:AMD) broke out to fresh multi-year highs yesterday. AMD stock finally closed above the $34 level after three previous failed tries.  Momentum traders rejoiced, although shares did finish slightly off the highs of the day.

Advanced Micro Devices has now added on over 30% since the lows near $26.50 in late May. All good things must come to an end, though. The red-hot rally in an overbought and overvalued AMD has come too far, too fast. Time to take some chips off the table.

InvestorPlace contributor Jay Yao recently pointed out both the bullish and bearish case for AMD stock. He noted that AMD stock price was comparatively expensive, trading at a forward P/E of 33. Advanced Micro Devices is certainly expensive on trailing P/E basis with shares now sporting a multiple of 137! This is by far the richest valuation over the past year. The only other time AMD exceeded a 125 trailing P/E was in June, which marked a significant short-term top in the stock price.

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Advanced Micro Devices is looking overdone from a technical perspective as well. AMD stock price is up over 80% year-to-date. Momentum is approaching an extreme reading near 5 which has corresponded to powerful pullbacks in the past. Bollinger Band Percent B is back above 1, signaling overbought levels.

AMD stock is trading at a large premium to the 20-day moving average. Previous instances when AMD traded at such a large premium led to a move back to the 20-day moving average.

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Earnings for Advanced Micro Devices are due in late July with expectations for 9 cents in EPS on $1.52 billion in revenues. The last four quarters have seen AMD earnings come in within a penny or two of expectations. Given the historically rich valuations and overbought technicals, it will take a blow out quarter to propel AMD appreciably higher. I don’t see that happening.

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Stock traders should look to short AMD on any further strength. The initial price target is the 20-day moving average near $31.

Option traders may want to take advantage of high implied volatility in front of earnings and sell an out of the money bear call spread. Selling the Aug $38/$40 call spread would bring in 40 cents credit while risking $1.60 for a 35% return on risk. The $38 strike price provides a 10.5% upside cushion to the $34.39 closing price of AMD.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at 

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