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By Chris Johnson, MoneyMorning.com
Let me get something out in the open, the long-term outlook for NVIDIA (NVDA) is bullish.
The stock is the innovator of the decade with their AI chip designs, and they’re still developing new technology. Five years from now, the stock is going to be higher. I think everyone agrees on that.
But the last two weeks have been gut wrenching by any investor’s standard.
Shares of NVIDIA are trading almost 30% lower than their June highs. So far, investors have taken it in stride as the stock has been the absolute AI leader. But things have changed over the last three weeks.
The earnings season has been rough on NVIDIA, and the stock hasn’t even reported its quarterly results. NVIDIA is slated to report their quarterly results on August 28, 23 days from today.
The reason that the earnings season has been rough for NVIDIA is the cloud of uncertainty that has been cast over the valuation of AI technology from other companies reports.
We entered the earnings season with investors asking a simple, yet critical question, “are AI stocks worth their value?”.
The answer should have come with a resounding “yes” in the form of companies lifting their earnings guidance for the next quarter and beyond.
Instead, we’ve seen companies take a more conservative outlook by not raising their guidance for next quarter’s earnings. Even worse, some companies have warned that next quarter’s results will be lower than what investors expect.
That doubt has everyone looking at the second most valuable stock in the market, NVIDIA, with some uncertainty.
On Wall Street, uncertainty is a four-letter word, which is why we’re seeing so much selling of the stock.
Here’s What NVIDIA’s Chart is Forecasting and How to Avoid Losses Without Selling the Stock.
As of this morning, NVIDIA shares have found support at an easy to identify price target, $100. Shares started the day just above $90, but quickly ran to their highs at $102.36.
The support at $100 is easy to understand. $100 represents one of the strongest psychological support or resistance levels for a stock just because of its simplicity.
Just as easily, a close or two below $100 will cause investors to lose faith that this psychological price will hold sellers at bay, meaning that the stock will encounter another round of heavy selling ahead of the company’s earnings report on the 28th.
In that case, the stock is likely to target the $80 price as its next level of price support, another 20% below its current price.
This wouldn’t be the first time, or the last, that NVIDIA posted a 50% decline that was part of a broader market correction.
Here is the current price chart for NVIDIA.
The question stands, how can you avoid the potential for NVIDIA shares to drop another 20% if you don’t want to sell the stock?
The thing I hear often from friends is that they don’t want to sell NVIDIA or any of the other Magnificent Seven stocks because of their lofty gains.
This is especially the case if they’ve bought the stock in the last six to twelve months.
NVIDIA shares are up more than 100% since January 1, that’s including the recent 30% correction. Selling now may lock in that 100% gain but it would also qualify those gains as short-term capital gains and open them to a larger tax bill.
As always, talk to your tax planner when it comes to capital gains treatments, that’s not what I do.
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My response, and strategy, is to simply hedge a position like NVIDIA to offset the potential for further losses.
I know, you’re rolling your eyes right now because you think this involves options.
Wrong! It’s much easier with NVIDIA and a handful of other stocks.
Due to their popularity, NVIDIA and several other “Magnificent” stocks have an easier way to hedge against downside risk like we’re seeing in the market now.
In the height of the 2022 bear market a new line of ETFs was introduced to the market. Their goal was simple, to offer stock traders a way to short an individual stock, like NVIDIA, by buying an individual share.
“Tradr” ETFs launched a series of single stock inverse ETFs on several companies including NVIDIA as a vehicle to allow investors to hedge specific single stock positions.
According to the company, the Tradr 1.5X Short NVDA Daily ETF (NVDS) shares “seeks daily investment results, before fees and expenses, that correspond to 1.5 times the inverse (‑150%) of the daily performance of the common shares of NVIDIA Corporation (NVDA).”
That means that each share of the NVDS will go up roughly 1.5% for every 1% decline in NVIDIA stock.
For many investors, this provides a reasonable method to avoid large downside position without selling shares of NVIDIA in your portfolio.
Here’s how I would approach.
Say that I’ve got 150 shares of NVIDIA that I bought for $50 in December of 2023 for a total of $7,500. Today that stock is worth $15,400, more than 100% return in eight months.
If you think that there’s a chance NVIDIA trades to $80 you can “hedge” that risk by purchasing 100 shares of NVDS (150 shares NVDA/1.5) for a total cost of $4,930.
Now, let’s play this out to the worst-case scenario with NVIDIA stock dropping to $80.
At that price, your initial investment of $7,500 drops to a value of $12,000 for the year, still a respectable 60% gain for the year, but you’re certainly wringing your hands.
Now, the “hedged” position at $80 is worth around $18,000 since the NVDS shares have appreciated by about 30%. I say “around” because the company doesn’t hit the inverse 1.5% exactly.
In my case, at $80 I close the hedge, take the proceeds of about $6,400 and buy another 80 shares of NVIDIA ($6400/80 = 80),thus increasing my long-term holding at a decidedly lower price.
Looking forward, if NVIDIA returns to a price of $120 before year’s end, I now own 230 shares for a total value of $27,600 instead of the $18,000 value of simply watching the stock drop to $80 and then return to $120, not even its highs for the year.
On a side note, any hedge position requires an exit strategy. In this case, I keep an eye on the $110 price for NVIDIA as a trigger to close the hedge position. Additionally, keep in mind that any gains from the hedge will qualify as short-term gains and plan accordingly.
There you have it.
It seems complex, but it’s a simple way to not only hedge the current downside risk in NVIDIA but use the move to add to this AI leader at lower prices to get ready for the next move higher, which will come.
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