The Chip Stock at Risk of a Short-Term Slowdown

NVIDIA will report third-quarter earnings after tomorrow's close

Nov 8, 2017 at 2:31 PM
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Semiconductor stocks have been on fire in 2017, with NVIDIA Corporation (NASDAQ:NVDA) helping to lead the charge. While NVDA stock is down 2% at $207.88 today ahead of the chipmaker's turn in the earnings confessional tomorrow night, it still remains up nearly 192% year-over-year -- and hit a record high of $212.90 just yesterday. Nevertheless, the outperforming equity could be ready to slow its roll, if history is any guide.

Specifically, NVIDIA -- along with this housing stock -- is one of the top 20 S&P 500 Index (SPX) stocks with the biggest variations between May-to-October and November-through-April returns, going back to 2010. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, NVDA has averaged May-October gain of 23.14% over this time frame, compared to a November-April return of 12.41% -- a difference of negative 10.74%.

While a 12.41% six-month gain is still relatively impressive, any additional upside could put the stock back in overbought territory -- and at risk for short-term pullbacks. For instance, NVDA's 14-day Relative Strength Index (RSI) closed at a lofty 78 last night, but following today's retreat, this metric has dropped down to 67.7.

Meanwhile, the shares sold off sharply following the company's earnings report in mid-August -- shedding 5.3% in the subsequent session -- but have enjoyed a positive earnings reaction after six of the last eight releases. Looking back over the past eight quarters, NVDA stock has averaged a one-day post-earnings move of 12.3%, regardless of direction, with the options market pricing in a slimmer 11.5% swing this time around, based on at-the-money implied volatility data.

On the sentiment front, analysts are mixed toward the chip stock. While 13 of 25 brokerages maintain a "buy" or "strong buy" rating, the average 12-month price target sits at just $174.44. Echoing this, Deutsche Bank raised its price target earlier to $190 from $145, though this still represents a discount to NVDA's current perch.

Sentiment is a little more clear cut in the options pits, where traders have been buying to open calls relative to puts at a faster-than-usual clip in recent months. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), NVDA stock's 50-day call/put volume ratio sits at a top-heavy 1.55, and ranks higher than 82% of all comparable readings taken in the past year.


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