Macro Report/Insights: Semi's positioning
NVDA, SMH and the next move
“Misconceptions play a prominent role in my view of the world.”
― George Soros
Time and time again we see market participants buy into incorrect narratives about the prospects of future reward OR risks. However, you ALWAYS need to quantify the prevailing bias of participants with data points that are determined by actual money as opposed to sentiment surveys.
Well, we know mentions of AI increased exponentially at the end of 2022 and this was directly connected to the price action of Semi stocks. The main ones are obviously NVDA 0.00%↑ and SMCI 0.00%↑
But the more important dynamic at play is that the options skew is blowing out to an ATH extreme on SMH 0.00%↑ . The implication is that people are so afraid of missing out on the upside of SMH 0.00%↑ price action that they are functionally panic buying:
Total call open interest is at a high:
And outright implied vol of SMH 0.00%↑ is significantly elevated above the VIX:
Now the implication isn’t that Semi’s cant go up from here but that positioning makes it that much more difficult to have a sustainable rally when everyone is positioned long and paying a premium for those long. Understanding Semi’s and how they fit into capital flows for equities is critical right now. I broke this down in the alpha reports below:
Trades: Alpha Report and Week Ahead
There continues to be a prevailing bias among market participants to focus too closely on the words of the Fed and not understand the macro mechanics of the system. There is no alpha in knowing Fed Speak incredibly well because it’s already priced in!
Main idea: I would NOT be an aggressive buyer of Semi’s here because everyone is positioned long, call skew is at an extreme and there isn’t a clear edge that isn’t already priced in.
Keep a close eye on the following:
Watch the relative performance of inflation-sensitive sectors (XLE or XLB) compared to tech and semi’s. This will help you align the macro backdrop with your sector view.
Watch how skew and outright implied vol move into the end of March. We are likely to consolidate or move down in Semis before we make another leg up.
Watch how semi’s and tech transmit into the weighting of the S&P500 index. NVDA has become a much bigger part of the index but tech still holds a dominant place.
Generating alpha is always a battle against someone else. Don’t forget it!
