New Trade $MU: With Memory Of Past Sentiment Spikes, Fading Recent Enthusiasm

by Dan June 21, 2013 9:33 am • Commentary

At one point yesterday, MU shares were up 50% since the beginning of May breaking out to levels not seen since late 2006, as Wall Street analysts and investors have gotten increasingly excited about the supposed lack of supply of DRAM and NAND flash memory chips which is helping MU enjoy some long lost pricing flexibility.  I don’t have channel checkers in Taiwan, or contacts at computer or smartphone OEMs, but I will tell you from my nearly 16 years trading tech stocks that DRAM providers are at the very bottom of the PC supply chain as far as their ability to dictate long term pricing.  I have no way to know if the recent uptick in margins that MU just reported in their fiscal Q4 Wednesday night is sustainable, but if it is predicated on their ability to charge more as PC sales are rapidly declining and Smartphone sales (at least on the high-end are leveling off) my sense would be that the stock’s YTD gains of 113% may incorporate a bit of the so called recovery.

I am not making a long term call here by any means, as it is apparent from my comments above I am not that close to the story, but the stock is hitting valuation levels not seen since pre-financial crisis, and a combination of the extreme overbought condition, recent spike in positive sentiment and my general feelings on the broad market, the stock could set up for a 10% re-tracement over the next month with no identifiable catalysts.

The 10 year weekly chart shows MU’s recent breakout above the long-term resistance at $12.  That breakout led to a fast move above 14, but the ascent has gotten too steep in our view.

[caption id="attachment_27349" align="alignnone" width="637"]10 year weekly chart of MU, Courtesy of Bloomberg 10 year weekly chart of MU, Courtesy of Bloomberg[/caption]

A move back down to the $12 level (red line) would be the initial target on a pullback.

On an implied vol basis, the volatility has remained elevated after earnings because of the large call buying that has taken place in the last week:

[caption id="attachment_27350" align="alignnone" width="647"]30 day IV (red) vs. 30 day RV (blue) in MU, Courtesy of LiveVolPro 30 day IV (red) vs. 30 day RV (blue) in MU, Courtesy of LiveVolPro[/caption]

Realized is starting to pick up as well, and we anticipate that this could be an escalator up, elevator down type of situation.

TRADE: MU ($13.93) Bought July 13 Puts for .37

Break-Even on July Expiration:

-Profits below 12.63

-Losses of up to .37 btwn 12.63 and 13 with max loss of .37 above 13

Trade Rationale:  This is a short term TRADE for a pullback to recent breakout level  If the fundamentals are turning in a way that I don’t understand, then maybe a bunch of the recent upgrades will be correct and the stock sees the high teens, but my target of $11.50 -$12 in the near term would probably be just the sort of ideal entry for longs on a pull back.