August 22nd Daily Market Note: Pre-Earnings Rally in NVDA becomes contested and lack of market leadership stalls rally

Hi Folks, 

Here is my Daily Market Note for today!

Daily Market Note: August 22nd 2023 by Larry Cheung, CFA

Pre-Earnings Rally in NVDA becomes contested and lack of market leadership stalls rally

Forward-looking Conclusions of this note:

• Macro: The U.S. Retail Sector is spooked by Dick Sporting Good’s profit warning and aggressive slashing of prices to clear out inventory. Retail is one of the most important sectors in the S&P 500 as it conveys consumer confidence. My entire coverage list in Retail is impacted in today’s session with losses ranging from 2-5%. My Sell Put positions in DG/DLTR/FIVE are being impacted, but I stay confident in their longer-term positioning within Retail.
• U.S. Stock-Specific: Earlier today on Twitter, I provided a Members-only idea to the public (since Private Group Chat was formed later in the day) on Dicks Sporting Goods $DKS Strike 80 January 2024 being a compelling setup at time of entry. As of this note, the premium on this option has already depreciated 20%, netting us Sellers a 20% unrealized gain. I’m holding this position as it will take enormous selling force to get anywhere near close to 80, and any recovery at all will completely evaporate the options premium.
• Bonds: I believe the 10Y Yield is now finding a new equilibrium for the coming days in the 4.3%-4.35% region. A breakout past 4.35% will bring increased pressure on broader markets.
• China: With policy makers stepping in to halt the depreciation of the Yuan, I believe a stable CNH/USD will eventually be translated to higher prices for PDD, TCOM, EDU, and BABA.

Daily Market Note & Context

The market attempted a 2nd day recovery session with NVDA leading sentiment in the pre-market, with the first half the session exhibiting modest advances for the indices and the second half of the session remaining relatively subdued. I must discuss NVDA in today’s Daily Market Note as it is the primary reason behind the recovery from 358 to 363 on the QQQ over the past 2 trading sessions and continues to wield influence.

Ahead of earnings, NVDA trades at 56X Forward Earnings, 44X Sales, and 180X EV/EBITDA multiple. These are lofty figures. There is no doubt that NVDA is at the forefront of the AI Revolution, and most likely is the ultimate beneficiary in this secular growth story. The growth story is so compelling that analyst estimates generally have a consensus that NVDA EBITDA figures could be north of $24 billion in 2025 and $31 billion by 2026. For reference, NVDA delivered $6 billion in its last fiscal year.

In order for NVDA to move higher after earnings, I believe Jensen Huang will have to give confidence that those analyst estimates for 2025 and 2026 are likely to materialize and ideally have upside to those figures. If NVDA can do that, then I do agree with recent analyst price targets that the company can reach north of 500 per share in the coming 12 months. A disappointing outcome may result in revisiting a triple bottom technical structure at 400-405 last seen one week ago on Aug 14th and in late June. At the moment, the name is too volatile (price wise) for me to employ my Sell Puts strategy on it given its swings can arrive at my Strike Levels just in a few trading sessions, so I’m forced to stay on the sidelines on NVDA for now.

I think some of the FAAMG names currently offer better value than NVDA. MSFT touched that 315 Level mentioned in my previous Weekly Dashboard where I believed support would be incoming and META didn’t spend much time below 280. Our 285 & 290 MSFT Sept 2023 Sell Puts guided position should be relatively safe. The Puts on MSFT on my 285 Strike have fallen 40-50%, which means that we as Sellers have already captured 40-50% of the initial premium. My strategy is not designed for explosive gains but it tilts probability & statistics in our favor for higher win rates. MSFT has gone nowhere since I gave the above position idea, yet the Puts are down 40-50%. Same thing with AMD – AMD has also gone nowhere since I gave the 97 Strike idea, yet the 97 Strike Put has fallen 40% when AMD revisited 107 earlier today. 

Besides Dick’s Sporting Goods given earlier today, I have not taken any new positions.

Be back with more tomorrow!

--Larry