Micron (MU) – Deja Vu All Over Again?

by Dan June 20, 2019 2:56 pm • Trade Ideas

On Friday I updated a bearish view on semiconductor stocks (SMH – Chips and Dip?) suggesting…

Not much in mind has changed in the space since late April, the company-specific issues that have hit names like INTC are not likely to be helped by what i fear is a greater risk to a worse than expected second-half slowdown because most market participants are hopeful about some sort of trade deal.

I suspect we may get a couple of negative pre-announcements in the coming weeks prior to the end of the second quarter, especially if the rhetoric between China and the U.S. regarding our trade war does not abate by the end of the month at the G-20 in Japan. Regardless if we get a sort of “deal” that pushes out further tariffs and deescalates the war of words, I would still be surprised if companies are able to guide with any certainty for the back half of the year when they report in July and early August. The SMH is a sell imo.

On Friday’s Options Action, I matched my fundamental view with Carter Worth, of Cornerstone Macro Research’s technical view on the group, watch here:

My caveat Friday was pretty simple: “if there is some magical relief to this trade war this group is going to rocket back pretty quickly”. Well on Tuesday, Trump and China’s president Xi agreed to start discussions on trade negotiations that will lead to a meeting between the two leaders at the G-20 in Japan the weekend after next. The SMH did in fact rocket back on the news of the reinitiation of the trade talks, rallying from Monday’s $102 close to its high above $109 earlier to now trading at $107.50 as I write, or about 5.5%, nearly tripling the 1.9% gain of the S&P 500 (SPX) over the last three trading sessions.

The Fed’s continued dovish slant and the newfound optimism of some sort of trade deal has caused the SPX to make new all-time highs, but if recent history has shown us anything above 2900 in the SPX since Jan 2018, is that the market is nothing short of vulnerable at these levels and ill-advised policy by tweet on trade and geopolitical issues has the potential to quickly cause a change in sentiment.

As it stands for Semi’s, Broadcom’s (AVGO) negative preannouncement last week cannot be undone by a bs trade deal that does not include any meaningful action on forced technology transfer and IP theft, because until we have some sort of agreement for those the existing tariffs will likely need to stay in effect for a measure of enforcement. If the tariffs come off without a substantive deal that addresses anything other than the bilateral trade imbalance with China, then it will look like trump caved… Next week memory chip provider Micron will report theri fiscal Q3 results, and this will be a very important print to get a sense for just how deep the trade war is affecting supply chains and demand.

The options market is implying about a $2.70 move in MU between now and Friday June 28th close, or about 8%, which is rich to the 5% average one-day post-earnings move over the last four quarters.

Shares of MU are up only 8% on the year, most of it coming of late, but I guess more importantly the stock is down about 25% from its highs in the Spring. The year-to-date chart below shows the support near $32, near term technical resistance at $36 and massive resistance at $44:


There was a trade in MU options that is worth noting today when the stock was $34 right after twelve noon, a trader bought to open 10,000 of the July 33 – 25 put spreads paying $1.40. This trade breaks even down at $31.60, or about 7% from the trading price, and has a max gain of $6.60 at 25 or lower. If this is an outright bearish bet the trader might be targeting that $32 – $30 support zone that appears to be an important level going back five years:

Micron investor relations has not confirmed the earnings report, but for at least the last five years the company has reported their fiscal Q3 earnings prior to the end of June.