Weekend Market Report
In this Weekend Market Report, we do the usual Zettelkasten notes, gold and silver directional price forecasts, and S&P500 volatility forecasts. We dive into my notes and results of selling option premium and letting Theta decay work for you!
General Market Commentary
The markets stabilized this week after a sudden volatility spike on Monday. All indices I track (Dow, Nasdaq, S&P500, and Russell 2000) closed higher this week. Markets opened in panic on Monday as Traders assessed whether the bull run in the technology market was over.
The CBOE Volatility Index (VIX) also known as the “fear index” spiked to a high of 65.73 that day before closing lower to 38.57. If we were to compare the level of fear to past events, this was in the top 3 panic events. The big one was in October 2008 during the housing market MBS implosion and the second was in March 2020 when the world shut down because of Covid-19.
We all know that volatility spikes like this indicate a market crash with good assets going on sale everywhere, but that doesn’t mean you should buy stocks randomly. My initial thought was to buy Nvidia (NVDA) but I started to wonder if NVDA’s momentum is broken, just like what happened with GameStop (GME) after the “we like the stock” traders left.
Nvidia looks to be in a solid short-term downtrend, it’s trading below its 50 DMA and continues to make higher lows and lower lows. Only time will tell if he can dig its way out and move higher before earnings on August 28th.
Long holders of gold saw closing prices rise for the week whereas silver holders saw prices drop. Both directional forecasts for gold and silver prices were correct.
The S&P500 historical volatility forecast was for lower volatility last week and initial data shows the estimates to be correct, so the model is currently 80% accurate.
We expect the % accuracy to vary until we have at least 10 predictions or so. We’ll then evaluate the model if it’s bunk and anticipate the directional accuracy to be between 60% and 80% correct if the backtesting is valid.
Zettelkasten Notes
Welcome to a collection of links and notes that I find interesting. Affectionately called a Zettelkasten, a German word for notes in a box. Let me know in the comments if you like these links or not!
Niche Chipmakers Take on Nvidia’s Dominance
Is this a case of David vs Goliath? Perhaps but the need for speed when serving and inferencing Large Language Models (LLMs) is important. Even running on Nvidia’s GPU hardware requires bigger chipsets to make them barely manageable to use (IMHO). What if you have a chip designed for inferencing instead of training? Are there better scales of efficiency?
When he founded Groq eight years ago, Ross’s idea was to design AI chips explicitly for what’s known in the industry as “inference”: the part of artificial intelligence that mimics human reasoning by applying what it’s learned to new situations.
Richard Nieva
It looks like the niche chip makers like Groq are sizing up Nvidia’s dominance.
Challengers like Groq are bullish because Nvidia’s chips weren’t even originally built for AI. When CEO Jensen Huang debuted its graphics processing units (GPUs) in 1999, they were designed to run graphic-intensive video games. It was serendipitous that they’ve been the best-suited chips to train AI.
I remember when Nvidia was just about graphics cards, then by luck they were used for Bitcoin mining and now LLMs. I think the niche chip makers are a space to watch.
Super Micro (Smci) Announces 10:1 Split After Earnings Miss
A few months ago I wrote about Super Micro Computer, Inc. (SMCI) about how it hit an all-time high only to crash 3 days later. What can I say, these markets are very volatile and risky!
This week it announced earnings that disappointed. This added more fuel to the fire that technology stocks have peaked.
Super Micro Computer (SMCI) missed its fiscal fourth quarter 2024 earnings estimates, falling shy of revenue forecasts ($5.31 billion versus expectations for $5.32 billion) and its adjusted earnings per share missing the mark ($6.25 per share versus expectations for $8.25 per share).
With the stock being in a downtrend since February 2024, it’s easy to see that traders and investors wanted more out of these earnings than SMCI delivered.
Not to be upstaged by Nvidia and Broadcom, SMCI throws its investors a bone by declaring a 10:1 stock split, which did little to move the needle for them. With the downtrend intact and 50DMA about to cross the 200DMA, things are not boding well for Super Micro.
Vix Futures Options Coming Soon
Yowzers! The market continues to develop products and investment instruments to separate you from your money! Welcome to new VIX options tied to the futures market on top of the VIX options already in the stock market.
Cboe currently offers securities-based VIX Index options, which allow investors to manage or gain exposure to broad U.S. equity market volatility. The new options on VIX futures will provide similar utility but are based on front-month VIX futures. With futures as the underlying asset, these options will be CFTC-regulated, enabling a wide array of market participants that are restricted from accessing U.S. securities-based options to use this product to express their views on equity market volatility. - Via Yahoo Finance
As I keep expanding my understanding of options, I think this is a great idea. Remember though, options are complex, risky, and crazy but can make you a lot of money. You can also lose a lot of money as well, my options trading account shows I’m still down $500 for the year.
Silver Price Forecast 1 Week Ahead
Silver closed down to $27.52 from $28.24 a drop of -2.55%. Last week’s price direction forecast was correct. The model is currently correct for price direction 70% (7 out of 10).
The mean silver price forecast for next week is lower. We are forecasting a possible swing high price of $29.94 and a swing low of $27.36 for next week.
The 4-week outlook for prices looks to be flat to slightly higher.
Gold Prices Forecast 1 Week Ahead
Gold closed up to $2,470.60 from $2,425.69 last week, an increase of +1.85%. Last week’s price direction forecast was correct. The model is currently correct for price direction 70% (7 out of 10).
The mean forecast for the Gold prices is lower for next week. A swing high price of $2,515.74 and a low of $2,354.11 is forecasted.
The 4-week outlook for prices remain flat to slightly higher.
S&P500 Historical Volatility Forecast 1 Week Ahead
Last week’s 5-day historical volatility model closed at 0.319 from 0.212 the week before. Last week’s forecast for historical volatility (HV) was correct.
The 5-day HV directional forecast for next Friday is for HV to close lower.
The directional forecast model is 5 for 6, or 83.3% correct. Note, that this accuracy will probably drop to about 60% accuracy over time as we test it in the field.
The forecast is predicting an elevated HV for the next 8 weeks with a slight downtrend.
Spotlight: Making Money Selling Option Premium
I started experimenting with options in March 2024 to manage my portfolio risk and make some extra money. At first, I made a lot of money buying COST and AMD calls only to blow it all and more one month later on more COST and AMD calls.
In April I had caught the hubris and thought COST and AMD would go higher in a certain period. Instead, both share prices dropped and I sold my call options at a deep discount. Then right before the day of the expiration, the share prices for both perked up and I could’ve gotten out with a small profit.
My timing was off. Theta decay worked against me.
Ouch, that was a painful lesson to be learned but I realized something in my bones. With proper risk control, you can make good money on options by selling premiums and letting the buyers deal with time decay.
What if I could make theta decay work for me? That’s when I learned about the Wheel Strategy and selling Cash Secured Puts (CSP). So I decided to try selling option premium with an eye on not overleveraging myself with risk.
I went on a covered call writing and CSP spree and sold covered calls on Ford (F) and Johnson and Johnson (JNJ). This started to net me an extra $200 to $600 per week. I own about 1000 shares of Ford and 400 shares of JNJ.
Once again, I started feeling like hot shit and caught more hubris, so when the QQQ and NVDA tanked hard, I bought some call options for 8/23 expiration. This might make me look dumb since Theta decay is working against me again!
On top of that questionable options buy, I overleveraged myself. I took on too much risk and bought too many contracts thinking I couldn’t go wrong. As my father used to say, “Even the smartest mice get caught.”
The moral of this story is selling premium and letting Theta decay work for you is the winning strategy, if and only if you watch your risk. Don’t let one stupid trade blow up all the income you made!
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