Daily Briefing: Broadcom Earnings & the employment report

By /

Samwise Model Portfolios

The portfolios below are separated by launch dates. Each portfolio is entirely independent and has no bearing on any other model portfolio. We launch entirely new portfolios during each market correction as an illustrative tool for new subscribers who weren’t present during the previous buying opportunities in the market. To date, we’ve launched four portfolios during two separate corrections.

Please login to view the Samwise Portfolio.

11:25 AM EST: Broadcom (AVGO) earnings to dictate direction Heading into next week

With the market up today on a far weaker than expected ADP report, it tells me that weaker data is starting to get priced in a bit. ADP is often a window into the more widely watched employment report. That being said, I Broadcom’s earnings may have a bigger impact in terms of the near-term direction for tech stock. Especially given how weakly the NASDAQ-100 and Nvidia are trading off of their oversold conditions.

Nvidia (NVDA) pushed way down into extreme oversold territory and has barely even bounced at the point. The entire rebound off of $104 has been very anemic compared to what we’ve seen out Nvidia in the past and compared to what we should normally see when a stock like Nvidia becomes that oversold.

That tepid move off the lows suggests that buyers are still very tentative and waiting for Broadcom, the jobs report and inflation next week. We actually have quite a few catalysts coming up over the next 7-8 trading sessions as the fed is up to bat right after next week’s data. We also have Apple announcing its Ai-powered iPhone 16 which could move the markets depending on the quality of the announcements.

The Intermediate-Term is still Bullish
While the near-term may be a little uncertain given the wide range of catalysts coming up over the next 8-9 days, it’s important to keep a broad perspective on things. The overall big picture is still vey bullish for a wide number of reasons.

First, Nvidia (NVDA) being 25% off of its all-time highs coupled with the fact that we’re trading near the $90-$105 range tells us that we’re right near the trading lows. Nvidia may spend some time consolidating, doing some technical testing and retesting here, but we’re likely going higher right after all that is done with in the weeks and months ahead.

Second, it’s important to remember that while tech is underperforming right now and has a bit of a bearish sentiment driving things, the broad S&P 500 is still very much bullish across all time-frames. The SPY went into the week near its all-time highs and is still barely just off of them. We’re talking a mere 2.65% off of its ALL-TIME highs. That’s still very bullish. Also, the technical formation on the SPY couldn’t be stronger. It is forming a cup & handle type of formation which is generally bullish. While the NASDAQ-100 has given up nearly 6% of its gains and entered in to what has historically constituted a small correction, the SPY has only seen a minor pull-back at this point.

The reason this is important is because the broad market across all sectors on average is still on a bullish heading. If the market begins to rally again, that’s going to put upside pressure on tech and eventually re-ignite the tech rally. In fact, with as much as tech is down relative to the S&P 500 and given tech’s weighting in the index, it’s likely that tech is what is driving the entire pull-back on the S&P instead of bearish economic sentiment.

To sum up on where things stand right now, we’ve yet to see any kind of real rebound off of oversold condition. The markets are in a wait and see stance at the moment given Broadcom, given the employment report tomorrow, given inflation data being released next week. At the same time, as oversold as Nvida (NVDA) has become, it’s due for a big rebound. If Nvidia (NVDA) takes another leg lower toward the $97-$103 range, it’s likely falls back into oversold territory and will likely then see a massive bounce post-data releases.

11:45 AM EST

our investment strategy in this Environment

As Sam Weiss is concerned, it’s important to remember that we’re a long-term oriented group and for good reason. It’s also important to reiterate that our goals here are to buy on major pull-backs, sell covered calls against those positions as the market rallies, and then eventually sell and or roll our positions forward depending on what we’re holding. That type of strategy is largely going to outperform virtually all other strategies in the long-term. Buying Nvidia at just under $105 yesterday is a huge first step in the overall process.

Been at this for a very long time. Long enough to know that simply being in the market and participating in the largest rallies beats trading high risk assets in the overwhelming majority of the time. Sure, you’ll have a handful of lottery winners that perform by timing the market and trading into and out of high risk position. But in most cases, betting on long-dated DITM leaps or straight common stock, selling intermediate to long-term covered calls against those position, and participating in the rally is the surest way to produce significant returns over the long haul.

And to that end, I’ve published two chapters on our Core Investment Principles. The first one involves time horizon and why it’s critically important to maintain a 2-year time horizon when buying stocks, options and other derivatives. The second one involves the use of inherent leverage like long-dated deep in the money call options (DITM calls) to potentially reduce your risk and enhance your returns. I highly suggest you read both sections.

Chapter 1: Time can be your greatest strength or your worse nightmare
Chapter 2: Using inherent leverage to reduce risk and enhance returns

We’ll be sticking to a lot of the principles and ideas published under the investing basics tab. The tl;dr of lesson one is that we’re always going to adhere to the 2-year rule when buying risk assets. That doesn’t mean we’ll be holding for 2-years. Just that when we do buy, we do so with the perspective that we may very well be buying for 2-years. In all honestly, simply holding for 2+ years often produces much better returns than not. The longer you remain long in the stock market, them more likely it is for an investor to produce generational wealth. Anyone who bought tech stocks during the last bear market in 2022 and has been holding those stocks this entire time is up massively right?

Long Dated DITM Calls versus Leveraged ETFS
I’ve had a few people ask me about comparing Deep in the Money Call Options to Leveraged ETFs. Since there seems to be a lot of interest on the topic, I’ll be publishing a full write up on that under Chapter 2. In fact, Parts IV and V will involve comparing DITM call options to margin and DITM call options to the use of leveraged ETFS.

12:15 PM EST

on investment Strategy, continued

A few other key things I wanted to add on the above note is this. From an organizational stand point, Chapters 1, 2 and 3 in our investment principles will form a large part of foundation of our investment strategy. Chapter 1 outlines why having a 2-year time horizon is critically important. Chapter 2 outlines why we prefer DITM calls as our form of leverage. We’ll always have two portfolios. A common stock portfolio and a DITM call option portfolio. The underlying assets and allocation will be pretty much identical.

Chapter 3, which will be published this weekend, will discuss why we prefer to use intermediate-term call-options to hedge out risk. There was a long while where I’d sell weekly calls against my long position in Tesla, Apple or the NASDAQ-100. I was really successful at the weekly sales on the Tesla trade having avoided being called away. But selling short-term covered call options almost invariably leads to trouble and it’s easy to wipe out covered call gains in one bad week of trading. Not the investment gains. But the gains from the hedge. There are other big problems with selling near-term calls and I’ll cover those issues in chapter 3.

But what I’ve learned over a decade of selling covered calls is that the best way to hedge is to simply sell intermediate-term calls. Especially after the stock has had a big run. Whenever we get big rallies, the market gets hyper euphoric and you end up with these extremely overvalued intermediate-term call options. For example, when Nvidia was at $130 a few weeks back, I think the January $165 calls were trading at like $8 or something like that. I remember writing about it somewhere as a way to hedge. That would mean Nvidia would have had to rise another $35.00 — after having rallied 50% — just to reach the strike price.

Selling those calls as a hedge against a DITM call option would have been huge right now. Why? Because we would have off-set $8.00 in losses. Nvidia was unlikely to ever get to $165. Granted those January calls were priced as such AHEAD of earnings and so there was a bit of earnings-based premium built into them.

But selling those options was mostly a win-win across the board. If we were long the Nvidia $90 calls as we are now at the $45 per contract price, that $8.00 hedge instantly reduces our cost-basis by 20% in just one go. What’s the worst that can happen? Nvidia rallies to $173 by earnings and we break-even on the hedge while hitting a grand slam on the leaps?

Again, we’ll talk about this more in Chapter 3. The big take away here is that by selling intermediate-term covered calls over weeklies, we get to participate in they while creating a strong hedge against our position.

3:45 PM EST

tech Consolation points to a big Move Tomorrow & next week

All the technology stocks I’m watching today are forming the same exact technical set-up. The QQQ, Broadcom, Nvidia, Apple and the other mega cap names (except Amazon doing its own thing) look the same. Big moves down earlier in the week, followed by two-days of consolidation. Normally, that consolidation would be clearly bearish given that they’re occurring after a sharp move lower. But with Braodcom’s earnings today and with the employment report tomorrow, it’s possible we could see these set-ups break to the upside.

Still, my gut tells me we’re likely headed for a breakdown. Forecasting clarity is low. So I could very easily be wrong there. Good earnings from Broadcom followed by a better than expected employment report could easily push things higher. Especially when you consider the fact that Nvidia (NVDA) pushed down into deeply oversold territory and still hasn’t rebounded. That’s not the norm. In fact, I don’t think we’ve seen that happen in years. The hourly on a technical basis look like crap. It looks like breakdown tomorrow, but the news controls here.

Take a look at the gallery below. Notice how everything seems to be trading in unison

SPY
NVDA
AVGO
QQQ
SPY
NVDA
AVGO
QQQ
0 0 votes
Article Rating
4 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Bill Holcombe

On the DITM calls the profit is when you exercise them correct?

So do you always execute DITM calls if they are above the strike price?

0
Sam Weiss

No. Not at all. Think of them as a separate regular asset. We never exercise options at all. But there is one strategy where you definitely can do that and it would be in the stock-substitution strategy outlined here:

https://sam-weiss.com/investing-basics/inherent-leverage-3/

If you scroll down to the next slide, it coves that idea a little. But here at Sam Weiss, we’re never going to exercise. When we buy DITM calls, it will be with intention of selling the calls down the line at a higher price.

With call and put options, you can buy them and can sell them as freely as you would NVDA common stock. They’re just a little less liquid and sometimes the bid/ask spread can be wide. Especially in some options that are lightly traded. With popular stocks like NVDA, the bid/ask spread is relatively tight allowing investors to buy and sell them teh same way they might buy and sell a stock.

In the 25-years I’ve been invested in the market, I can count on 1 hand the number of times I’ve ever exercised an option. I know it has happened before, but I’m rarely delving into a strategy that requires exercising.

0
Marvin Esch

Isn’t it likely that we won’t see the bottom until October, as September tends to be a bad month for stocks?

0
Tevfik Gezgin

AVGO reported upbeat earnings (topline, bottom-line and outlook) yet stock is down 5%. Given this, would you expect a breakdown to new lows tomorrow if the job report isn’t stellar?

0

Related Posts

Scroll to Top