On Wednesday US Eastern Time, in the face of bearish news such as the US government's upgrade of restrictions on chip exports and Trump's comments, the US semiconductor sector fell across the board. Nvidia fell nearly 7% in a single day, while TSMC and Broadcom both fell nearly 8%. AMD fell more than 10% and ASML fell nearly 13% after its earnings release.
Despite a slight rebound in US chip stocks as of press time after a sharp fall overnight, the bull and bear views on Wall Street are still divided, and the uncertainty of the US stock market in the second half of the year is gradually increasing. For investors who hold semiconductor stocks, or are optimistic about them for the long term and waiting for the opportunity to buy at a low price, how should they deploy their investment?
With the sudden bearish news on chip stocks, how to view the market in the future?
Some analysts from major banks believe that the previous boom of US tech stocks has led to soaring valuations, making the bullish trend increasingly "fragile" and more responsive to bearish news.
Goldman Sachs analyst Ruben Rabago said he does not believe in buying the dip. After a series of record highs, the US stock market is exposed to the risk of weak inflows and is susceptible to negative news. Historically, August is usually the worst month for passive investment and mutual fund outflows. As for trend-following system funds, the positions have reached maximum scale, which means there is no further room for buying.
Bespoke Investment Group strategist also believes that it is worth continuing to watch this round of correction. He said that usually, the impact of this type of news does not last too long, but in this case, we will notice that the performance of the semiconductor industry has been lagging behind the market for the past few weeks. Therefore, this is worth paying attention to.
At this time, it happens to be the earnings season. Morgan Stanley analyst Charlie Chan also suggested paying attention to the financial reports related to the semiconductor industry. He added that in the performance briefings of TSMC and Nvidia's main suppliers, their "geopolitical risk mitigation strategy" may be discussed. "Since the recent US presidential debate, investors have been increasingly asking about trade issues."
Of course, the panic selling of AI popular stocks like Nvidia has happened several times before, but overall, the trend will still fluctuate upwards. Therefore, most views believe that there is no need for excessive reaction, and it is even a "good thing" for the upcoming earnings season.
Global X Management investment strategist Billy Leung said, "This decline is more related to market sentiment than real fundamental concerns. The trade restrictions on semiconductors are a long-standing problem, and gradual tightening measures should not have a substantial impact. It may be that investors take the opportunity to profit from the liquidation."
Academy Securities strategist also believes that the export control issues faced by the semiconductor industry have always existed, but these concerns have been magnified recently. He wrote, "I personally believe that there is no need to panic and sell semiconductor stocks. The correction in the July earnings season and the hedging trades are conducive to reducing the overly high expectations before the release of performance reports and boosting investors' sentiment in the semiconductor industry."
Under the fluctuation of the market, what are some good deployment strategies?
Although chip stocks have rebounded slightly after a sharp fall overnight, looking ahead, key moments such as rate cuts, elections, and earnings seasons are approaching, and the uncertainty of the US stock market is increasing. So, under market fluctuations, what hedging strategies are available?
Taking Nvidia as an example, IBD website's technical analyst believes that its stock price has fallen below the 21-day moving average and is heading towards the 50-day moving average that needs close attention. If Nvidia falls below the 50-day moving average on high volume, it will trigger more sell signals.
Therefore, for investors who hold stocks but want to stand still, they can use investment tools such as reverse ETFs and put options to hedge against the risk of holding positions stagnating or falling.
Nvidia, semiconductor sector, and the Nasdaq all have leveraged reverse ETFs with different multiples in the US stock market, including:
$Direxion Daily Nvda Bear 1X Shares (NVDD.US)$,$GraniteShares 2x Short NVDA Daily ETF (NVD.US)$;
$Direxion Daily Semiconductor Bear 3x Shares ETF (SOXS.US)$,$Proshares Trust Ultrashort Semiconductors New 2020(R/S) (SSG.US)$;
$ProShares UltraPro Short QQQ ETF (SQQQ.US)$,$Direxion Daily Technology Bear 3X Shares ETF (TECS.US)$;
In addition, there are also ETFs that bet on the rise in S&p 500 index volatility and are linked to the "Panic Index" VIX:
$ProShares Ultra VIX Short-Term Futures ETF (UVXY.US)$,$ProShares VIX Short-Term Futures ETF (VIXY.US)$
For investors who are short and want to enter at the right time, they can either wait for buying points or use a sell put option to earn option premium income and even bottom feed at the ideal price. This strategy bets on the stock price rising moderately.
According to analyst Mark R. Hake of Barchart, for stocks to bottom feed, investors can also use the method of selling out-of-the-money put options (strike price lower than current price). Take NVIDIA as an example, the analyst believes that its target price should reach $200, with 53% upside from the current level. When the stock price falls, sell put options with expiry on August 2nd and strike price of $116, with a buying price of $4.3. For each contract sold, the profit is $4.3, and the total income is $430.
If NVIDIA stays above $116 before expiration, the option will expire worthless, and the net profit at expiration will be $430; but if the stock price falls below $116, investors can also exercise at $116/share and buy NVIDIA, while also receiving $430 in option premium.
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