January 2019

What’s Behind the NVIDIA Meltdown

Great company – lousy time to be this great company.

That is the least I can say for GPU chip company Nvidia (NVDA) who issued a cataclysmic earnings alert figuring it was better to spill the negative news now to start the healing process earlier.

This stock is a great long-term hold because they are the best of breed in an industry fueled by a secular tailwind in GPUs.

But this doesn’t mean they will be gifted any freebies in the short term and, sad to say, they have been dragged, kicking and screaming, into the heart of the trade skirmish along with Apple (AAPL) and buddy Intel (INTC) amongst others.

The best thing a tech company can have going for them right now is to have no China exposure, that is why I am bullish on software companies such as PayPal, Twilio, and Microsoft.

I called the chip disaster back in summer of 2018 recommending to stay away like the plague.

The climate has worsened since then and like I recently said – don’t buy the dead cat bounce in chips because the bad news isn’t baked into the story yet or at least not fully baked.

It’s actually a blessing in disguise if banned in China if you are firms such as Facebook (FB), Google (GOOGL), and Amazon (AMZN).

I recently noted that a material end to this trade war could be decades away and the tech world is already being reconfigured around the monopoly board as we speak with this in mind.

Where do things stand?

The US administration took a scalp when Chinese communist backed DRAM chip maker Fujian Jinhua effectively shuttered its doors.

Victory in a minor battle will likely embolden the US administration into continuing its aggressive stance if it is working.

If you forgot who Fujian Jinhua was… they are the Chinese chip company who were indicted by the U.S. Justice Department for stealing intellectual property (IP) from Boise-based chip behemoth Micron (MU).

The way they allegedly stole the information was by poaching Taiwanese chip engineers who would divulge the secrets to the Chinese company buttressing China in pursuing their hellbent goal of being able to domestically supply enough quality chips in order to stop buying American chips in the future.

Officially, China hopes to ramp up its self-sufficiency ratio in the semiconductor industry to at least 70% by 2025 which dovetails nicely with the broader goal of Chinese tech hegemony.

Fujian Jinhua was classified as a strategically important firm to the Chinese state and knocking the wind out of their sails will have a reverberating effect around the Chinese tech sector and will deter Taiwanese chip engineers to act as a go-between.

According to a research note by Zhongtai Securities, Jinhua’s new plant was expected to have flooded the market with 60,000 chips per month and generate annual revenue of $1.2 billion directly competing with Micron with their own technology borrowed from Micron themselves.

Jinhua’s overall goal was to support a monthly manufacturing target of 240,000 chips spoiling Chinese tech companies with a healthy new stream of state-subsidized allotment of chips needed to keep costs down and build the gadgets and gizmos of the future.

For the most part, it was unforeseen that the US administration had the gall and calculative nous to combat the nurtured Chinese state tech sector.

However, I will say, it makes sense to pick off the Chinese tech space now before they stop needing American chips at all in 5-7 years and when all remnants of leverage disappear.

The short-term pain will be felt in the American chip tech sector which is evident with the horrid news Nvidia reported and the aftermath seen in the price action of the stock.

Nvidia expects top line revenue to shrink by $500 million or half a billion – it’s been a while since I saw such a massive cut in forecasts.

Half of revenue comes from the Middle Kingdom and expect huge downgrades from Apple on its earnings report too.

If this didn’t scare you, what will?

These short-term headwinds are worth it to the American tech sector as a whole.

To eventually ward off a future existential crisis when Chinese GPU companies start offering outside business actionable high quality chips curated with borrowed technology, funded by artificially low debt, and for half the price is worth its weight in gold.

The same story is playing out with Huawei around the globe but at the largest scale possible.

This is what happens when the foreign tech sector is up against companies who have access to unlimited state loans and is part of wider communist state policy to take over foundational technology globally.

I will also emphasize that the Chinese communist party has a seat on every board at any notable Chinese tech company influencing decisions at the top even more than the upper management.

If upper management stopped paying heed to the communist voice at the table, they would be out of business in a jiffy.

Therefore, Huawei founder Ren Zhengfei standing at a podium promulgating a scenario where Huawei is operating freely from the government is what dreams are made of.

It’s not a prognosis rooted in reality.

The communist party are overlords breathing down the neck of Huawei after any material decisions that can affect the company and subsequently the government’s position in the interconnected world.

The China blue print essentially entails a pan-Amazon strategy emphasizing large volume – low cost strategy.

Amazon was successful because investors would throw money at the company until it scaled up and wiped the competition away in one fell swoop.

Amazon is on a destructive path bludgeoning every American second-tier mall reshaping the economic world.

The unintended consequences have been profound with the ultimate spoils falling at the feet of CEO and Founder of Amazon Jeff Bezos, his phalanx of employees as well as Amazon stockholders which are mostly comprised of wealthy investors.

Well, Chairman Xi Jinping and the Chinese communist party are attempting to Amazon the American tech sector and the broader American economy.

The American economy could potentially become the second-tier mall in this analogy and the game playing out is an existential crisis for the likes of Advanced Micro Devices (AMD), Nvidia, Micron, Intel and the who’s who of semiconductor chips.

If stocks reacted on a 30-year timeframe, Nvidia would be up 15% today instead of reaching a trading day nadir of 17%.

What is happening behind the scenes?

American tech companies are moving supply chains or planning to move supply chains out of China.

This is an epochal manifestation of the larger trade war and a decisive development in the eyes of the American administration.

In fact, many industry analysts understand a logjam of failed trade solutions as a bonus to the Chinese.

However, I would argue the complete opposite.

Yes, the Chinese are waiting out the current administration to deal with a new one that might be more lenient.

But that will take another two years and publicly listed companies grappling with the performance of quarterly earnings don’t have two years like the Chinese communist party.

And who knows, the next administration might even seize the baton from the current administration and clamp down even more.

Be careful what you wish for.

Taiwanese company and biggest iPhone assembler Foxconn Technology Group is discussing plans to move production away from China to India.

India is a democratic country, the biggest democracy in Asia, and is a staunch ally of the United States.

CEOs of Google (GOOGL) and Microsoft (MSFT), some of Silicon Valley heavyweights, are from India and American tech companies have been making generational tech investments in India recently.

Warren Buffet even invested $300 million in an Indian FinTech company Paytm.

When you read stories about India being the new China, well it’s happening faster than anyone thought and on a scale that nobody thought, and the underlying catalyst is the overarching trade war fueling this quick migration.

Apple is already constructing low grade iPhones in India in the state of Karnataka since 2017, and these were the first iPhones made in India.

They won’t be the last either.

Wistron, major Taiwanese original design manufacturer, has since started producing the iPhone 6S model there as well.

And it is no surprise that China and its artificially priced smartphones have undercut Samsung and Apple in India grabbing the market share lead.

This is happening all over the emerging world.

And don’t forget if U.S. President Donald Trump revisits banning American chip companies supply channels to Chinese telecom company ZTE. That would be 70,000 Chinese jobs out the window in a nanosecond.

The current administration has drier powder than you think and this would hasten the deceleration of the Chinese economy and also move forward the American recession into 2019 boding negative for tech shares.

Therefore, I would recommend balancing out a trading portfolio with overweights and underweights because it is obvious that tech stocks won’t be coupled to a gondola trajectory to the peak of the summit this year.

It’s a stockpickers market this year with visible losers and winners.

And if China does get their way in the tech war, American chip companies will eventually become worthless squeezed out by mainland competition brought down by their own technology full circle.

They are first on the chopping board because their overreliance on Chinese revenue streams for the bulk of sales.

Among these companies that could go bust are Broadcom (AVGO), Qualcomm (QCOM), Qorvo (QRVO), Skyworks Solutions (SWKS) and as you expected Micron and Nvidia who are one of the main protagonists in this story.

January 29, 2019

Diary, Newsletter, Summary

Global Market Comments
January 29, 2019
Fiat Lux

Featured Trade:

(RISK CONTROL FOR DUMMIES),
(SPY), (AMZN), (TLT), (CRM), (VXX)

Risk Control for Dummies

Diary, Newsletter, Research

There is a method to my madness, although I understand that some new subscribers may need some convincing.

Whenever I change my positions, the market makes a major move or reaches a key crossroads, I look to stress test my portfolio by inflicting various extreme scenarios upon it and analyzing the outcome.

This is second nature for most hedge fund managers. In fact, the larger ones will use top of the line mainframes powered by $100 million worth of in-house custom programming to produce a real-time snapshot of their thousands of positions in all imaginable scenarios at all times.

If you want to invest with these guys feel free to do so. They require a $10-$25 million initial slug of capital, a one year lock up, charge a fixed management fee of 2% and a performance bonus of 20% or more.

You have to show minimum liquid assets of $2 million and sign 50 pages of disclosure documents. If you have ever sued a previous manager, forget it. The door slams shut. And, oh yes, the best performing funds are closed and have a ten-year waiting list to get in. Unless you are a major pension fund, they don’t want to hear from you.

Individual investors are not so sophisticated, and it clearly shows in their performance, which usually mirrors the indexes less a large haircut. So, I am going to let you in on my own, vastly simplified, dumbed down, seat of the pants, down and dirty style of risk management, scenario analysis, and stress testing that replicates 95% of the results of my vastly more expensive competitors.

There is no management fee, performance bonus, disclosure document, lock up, or upfront cash requirement. There’s just my token $3,000 a year subscription fee and that’s it. And I’m not choosy. I’ll take anyone whose credit card doesn’t get declined.

To make this even easier, you can perform your own analysis in the excel spreadsheet I post every day in the paid-up members section of Global Trading Dispatch. You can just download it and play around with it whenever you want, constructing your own best case and worst-case scenarios. To make this easy, I have posted this spreadsheet on my website for you to download by clicking here.

Since this is a “for dummies” explanation, I’ll keep this as simple as possible. No offense, we all started out as dummies, even me.

I’ll take Mad Hedge Model Trading Portfolio at the close of October 29, the date that the stock market bottomed and when I ramped up to a very aggressive 75% long with no hedges. This was the day when the Dow Average saw a 1,000 point intraday range, margin clerks were running rampant, and brokers were jumping out of windows.

I projected my portfolio returns in three possible scenarios: (1) The market collapses an additional 5% by the November 16 option expiration, some 15 trading days away, falling from $260 to $247, (2) the S&P 500 (SPY) rises 5% from $260 to $273 by November 16, and (3) the S&P 500 trades in a narrow range and remains around the then current level of $260.

Scenario 1 – The S&P 500 Falls 5%

A 5% loss and an average of a 5% decline in all stocks would take the (SPY) down to $247, well below the February $250 low, and off an astonishing 15.70% in one month. Such a cataclysmic move would have taken our year to date down to +11.03%. The (SPY) $150-$160 and (AMZN) $1,550-$1,600 call spreads would be total losses but are partly offset by maximum gains on all remaining positions, including the S&P 500 (SPY), Salesforce (CRM), and the United States US Treasury Bond Fund (TLT). My Puts on the iPath S&P 500 VIX Short Term Futures ETN (VXX) would become worthless.

However, with real interest rates at zero (3.1% ten-year US Treasury yield minis 3.1% inflation rate), the geopolitical front quiet, and my Mad Hedge Market Timing Index at a 30 year low of only 4, I thought there was less than a 1% chance of this happening.

Scenario 2 – S&P 500 rises 5%

The impact of a 5% rise in the market is easy to calculate. All positions expire at their maximum profit point, taking our model trading portfolio up 37.03% for 2018. It would be a monster home run. I would make back a little bit on the (VXX) but not much because of time decay.

Scenario 3 – S&P 500 Remains Unchanged

Again, we do OK, given the circumstances. The year-to-date stands at a still respectable 22.03%. Only the (AMZN) $1,550-$1,600 call spread is a total loss. The (VXX) puts would become nearly a total loss.

As it turned out, Scenario 2 played out and was the way to go. I stopped out of the losing (AMZN) $1,550-$1,600 call spread two days later for only a 1.73% loss, instead of -12.23% in the worst-case scenario. It was a case of $12.23 worth of risk control that only cost me $1.73. I’ll do that all day long, even though it cost me money. When running hedge funds, you are judged on how you manage your losses, not your gains, which are easy.

I took profit on the rest of my positions when they reached 88%-95% of their maximum potential profits and thus cut my risk to zero during these uncertain times. October finished with a gain of +1.24. By the time I liquidated my last position and went 95% cash, I was up 32.95% so far in 2018, against a Dow average that is up 2% on the year. It was a performance for the ages.

Keep in mind that these are only estimates, not guarantees, nor are they set in stone. Future levels of securities, like index ETFs, are easy to estimate. For other positions, it is more of an educated guess. This analysis is only as good as its assumptions. As we used to say in the computer world, garbage in equals garbage out.

Professionals who may want to take this out a few iterations can make further assumptions about market volatility, options implied volatility or the future course of interest rates. And let’s face it, politics was a major influence this year.

Keep the number of positions small to keep your workload under control. Imagine being Goldman Sachs and doing this for several thousand positions a day across all asset classes.

Once you get the hang of this, you can start projecting the effect on your portfolio of all kinds of outlying events. What if a major world leader is assassinated? Piece of cake. How about another 9/11? No problem. Oil at $150 a barrel? That’s a gimme.

What if there is an Israeli attack on Iranian nuclear facilities? That might take you all of two minutes to figure out. The Federal Reserve launches a surprise QE5 out of the blue? I think you already know the answer.

Now that you know how to make money in the options market, thanks to my Trade Alert service, I am going to teach you how to hang on to it.

There is no point in being clever and executing profitable trades only to lose your profits through some simple, careless mistakes.

So I have posted a training video on Risk Management. Note: you have to be logged in to the www.madhedgefundtrader.com website to view it.

The first goal of risk control is to preserve whatever capital you have. I tell people that I am too old to lose all my money and start over again as a junior trader at Morgan Stanley. Therefore, I am pretty careful when it comes to risk control.

The other goal of risk control is the art of managing your portfolio to make sure it is profitable no matter what happens in the marketplace. Ideally, you want to be a winner whether the market moves up, down, or sideways. I do this on a regular basis.

Remember, we are not trying to beat an index here. Our goal is to make absolute returns, or real dollars, at all times, no matter what the market does. You can’t eat relative performance, nor can you use it to pay your bills.

So the second goal of every portfolio manager is to make it bomb proof. You never know when a flock of black swans is going to come out of nowhere, or another geopolitical shock occurs, causing the market crash.

I’ll also show you how to use my Trade Alert service to squeeze every dollar out of your trading.

So, let’s get on with it!

To watch the Introduction to Risk Management, please click here.

Mad Hedge Market Timing Index

Trade Alert - (AAPL) January 28, 2019 - SELL

Tech Alert, Trade Alert

When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more

Mad Hedge Hot Tips for January 28, 2019

Hot Tips

Mad Hedge Hot Tips
January 28, 2019
Fiat Lux

The Five Most Important Things That Happened Today
(and what to do about them)

1) The Shutdown is Over, But How Much Did it Cost Us?Standard & Poor’s says $6 billion but the restart costs will be greater. Click here.

2) Has the Bull Market for Emerging Markets Already Started? A weak dollar and falling dollar is all you need. That’s why securities you can’t pronounce have been on a tear so far in 2019. Buy (EEM) dip for the next six months. Click here.

3) Stocks Get Crushed on Slowing Global Economy, down 350 on terrible Caterpillar (CAT) numbers, a slowing global economy, and collapsing business confidence. We are way overdue for a sharp correction. Keeping my short in Apple (AAPL), already sold all my longs. Click here.

4) Brazilian Iron Ore Producer Vale Kills 300 in Brazil, when a tailings dam failed, delivering a body blow to a major commodity play. Stocks down nearly 20%. This is what deregulation gets you on a bad day. Your imported steel just got more expensive. Click here.

5) Meet the House of the Year, the most beautiful home published by the Wall Street Journal in 2018. This waterfront masterpiece on the Hawaiian island of Kauai can be yours for only $16 million, and I bet they’ll accept a lower offer. Click here.

Published today in the Mad HedgeGlobal Trading Dispatchand Mad Hedge Technology Letter:

(THE MARKET FOR THE WEEK AHEAD, or IT’S FINALLY OVER)

(SPY), (TLT), (FXE), (MSFT), (AAPL),

(PG), (F), (LRCX), (AMD), (XLNX)

(BUY DIPS IN SEMIS, NOT TOPS),

(XLNX), (LRCX), (AMD), (TXN), (NVDA), (INTC), (SOXX), (SMH), (MU), (QQQ)

January 28, 2019 - MDT Pro Tips A.M.

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more

January 28, 2019

Tech Letter

Mad Hedge Technology Letter
January 28, 2019
Fiat Lux

Featured Trade:

(BUY DIPS IN SEMIS, NOT TOPS),
(XLNX), (LRCX), (AMD), (TXN), (NVDA), (INTC), (SOXX), (SMH), (MU), (QQQ)

January 28, 2019

Diary, Newsletter, Summary

Global Market Comments
January 28, 2019
Fiat Lux

Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or IT’S FINALLY OVER)
(SPY), (TLT), (FXE), (MSFT), (AAPL),
(PG), (F), (LRCX), (AMD), (XLNX)

The Market Outlook for the Week Ahead, or It’s Finally Over

Diary, Newsletter

Last week, I was too busy to cook dinner for my brood, so I ordered a pizza delivery. When an older man showed up with our dinner, I told the kids to tip him double. After all, he might be an unpaid federal air traffic controller.

It is a good thing I work late on Friday afternoon because that's when the government shutdown ended after 35 days. The bad news? The government stops getting paid again in only 18 more days. If you have to travel, you better do it quick as the open window may be short.

The most valuable thing we learned from all of this is that the weak point in America is the airline transportation system which relies on 4,000 flights to get the country’s business done.

Having once owned a European air charter company, I could have told you as much was coming. Every nut, bolt, and screw that goes into a US registered aircraft has to be inspected by the federal government. They are painted yellow when viewed which is called “yellow tagging”. No inspection, no screw. No screw, no airplane. No airplane, no flight. No flight, no economy. I can’t tell you how many times I have seen a $30 million aircraft grounded by a failed 50-cent part.

And here’s what most investors don’t get. We lost 75 basis points in GDP growth from the shutdown. We may lose another 75 basis points restarting. And if you lose 1.50% from a post-Christmas period that is normally weak anyway, Q1 GDP may well come in negative. Hello recession!

We won’t know for sure until the first advanced estimate of Q1 GDP from the US Department of Commerce’s Bureau of Economic Analysis is published on April 26. That’s when the sushi will hit the fan. That, by the way, is perilously close for the May 10 prediction of the end of the entire ten-year bull market.

How did investors fare during the shutdown? We clocked the best January in 32 years with the Dow Average up 7.55%. Maybe the government should stay closed all the time!

It is not like the government shutdown, the fading Chinese trade talks, and the arrest of the president’s pal were the only things happening last week.

A slowing China is freaking out investors everywhere. Even if a trade deal is cut tomorrow, it may not be enough to pull the economy out of a downward death spiral. Look out below! A 6.6% growth rate for 2018 is the slowest in 30 years.

Existing Home Sales were down a disastrous 6.4%, in December and 10% YOY, the worst read since 2012. The government shutdown is made closings nearly impossible.

The EC’s Mario Draghi said there would be no euro rate rises until 2020 and the US bond market took off like a rocket. Another point or two and we’ll be in short selling territory again. Don’t count on Europe to pull us out of the next recession. Whoever came up with the idea of putting an Italian in charge of Europe’s finances anyway? Like that was such a great idea.

Procter & Gamble (PG) beat with an upside earnings surprise. It must be all those people buying soap to wash their hands of our political system. But Ford (F) disappointed, dragged down by weak foreign earnings. The weakest big car company to get into electric cars is really starting to suffer. The last of the buggy whip makers is taking a swan dive

The semis have bottomed in the wake of spectacular earnings reports from (LRCX), (AMD), and (XLNX). The great artificial intelligence play is back in action after a severe spanking. I never had any doubt they would come back. Now for an entry point.

Farmers are leaving crops to rot in the field as the trade war with China destroys prices and the Mexicans needed to harvest them are trapped at the border. There’s got to be an easier way to earn a living. Avoid the ags and all ag plays. Short tofu stocks!

Investors are now sitting on pins and needles wondering if we get a repeat of the horrific February of 2018, or whether so far great earnings reports will drive us to higher highs. Earnings tail off right when the next government shutdown is supposed to start so our lives will be interesting, to say the least.

My January and 2019 year to date return soared to +7.24%, boosting my trailing one-year return back up to +30.23%.

My nine-year return climbed up to +308.14%, a mere 1.72% short of a new all time high. The average annualized return revived to +33.61%.

I have been dancing in between the raindrops using rallies to take profits on longs and big dips to cover shorts.

I started out the week using the 4 1/2 point plunge in the bond market (TLT) to cover the last of my shorts there, bring in a whopper of a $1,680 profit in only 13 trading days. To quote the Terminator (whose girlfriend I once dated, the Terminatrix), I’ll be back.”

I used the big 500-point swoon in the Dow on Monday to come out of my (SPY) short at cost. An unfortunate comment on interest rates by the European Central Bank forced me to stop out of my long in the Euro (FXE), also at cost.

That has whittled my portfolio down to only two positions, a long in Microsoft (MSFT) and a short in Apple (AAPL). As a pairs trade you could probably run this position for years. I am now 80% in cash.

The goal is to go 100% into cash into the February option expiration in 14 trading days, wait for a big breakout, and then fade it. Essentially, I am waiting for the market to tell me what to do. That will enable me to bank double-digit profits for the start of 2019, the best in a decade.

The upcoming week is very iffy on the data front because of the government shutdown. Some government data may be delayed and other completely missing. Private sources will continue reporting on schedule. All of the data will be completely skewed for at least the next three months. You can count on the shutdown to dominate all media until it is over.

Jobs data will be the big events over the coming five days along with some important housing numbers. We also have several heavies reporting earnings.

On Monday, January 28 at 8:30 AM EST, we get the Chicago Fed National Activity Index.

On Tuesday, January 29, 9:00 AM EST, the Case Shiller National Home Price Index for November is released. The ever important Apple (AAPL) earnings are out after the close, along with Juniper Networks (JNPR).

On Wednesday, January 30 at 8:15 AM EST, the ADP Private Employment Report is announced. Pending Home Sales for December follows. Boeing Aircraft (BA) and Facebook (FB), and PayPal (PYPL) announce.

Thursday, January 31 at 8:30 AM EST, we get Weekly Jobless Claims. We also get the all-important Consumer Spending Index for December. Amazon (AMZN) and General Electric (GE) announce.

On Friday, February 1 at 8:30 AM EST, the January NonFarm Payroll Report hits the tape.

The Baker-Hughes Rig Count follows at 1:00 PM. Schlumberger (SLB) announces earnings. Home Sales is released. AbbVie Inc (ABBV) and DR Horton (DHI) report.

As for me, I will be celebrating my birthday. Believe me, lighting 67 candles creates a real bonfire. I received the best birthday card ever from my daughter which I have copied below

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

Buy Dips in Semis, Not Tops

Tech Letter

Don’t buy the dead cat bounce – that was the takeaway from a recent trading day that saw chips come alive with vigor.

Semiconductor stocks had their best day since March 2009.

The price action was nothing short of spectacular with names such as chip equipment manufacturer Lam Research (LRCX) gaining 15.7% and Texas Instruments (TXN) turning heads, up 6.91%.

The sector was washed out as the Mad Hedge Technology Letter has determined this part of tech as a no-fly zone since last summer.

When stocks get bombed out at these levels - sometimes even 60% like in Lam Research’s case, investors start to triage them into a value play and are susceptible to strong reversal days or weeks in this case.

The semi-conductor space has been that bad and tech growth has had a putrid last six months of trading.

In the short-term, broad-based tech market sentiment has turned positive with the lynchpins being an extremely oversold market because of the December meltdown and the Fed putting the kibosh on the rate-tightening plan.

Fueled by this relatively positive backdrop, tech stocks have rallied hard off their December lows, but that doesn’t mean investors should take out a bridge loan to bet the ranch on chip stocks.

Another premium example of the chip turnaround was the fortune of Xilinx (XLNX) who rocketed 18.44% in one day then followed that brilliant performance with another 4.06% jump.

A two-day performance of 22.50% stems from the underlying strength of the communication segment in the third quarter, driven by the wireless market producing growth from production of 5G and pre-5G deployments as well as some LTE upgrades.

Give credit to the company’s performance in Advanced Products which grew 51% YOY and universal growth across its end markets.

With respect to the transformation to a platform company, the 28-nanometer and 16-nanometer Zynq SoC products expanded robustly with Zynq sales growing 80% YOY led by the 16-nanometer multiprocessor systems-on-chip (MPSoC) products.

Core drivers were apparent in the application in communications, automotive, particularly Advanced Driver Assistance Systems (ADAS) as well as industrial end markets.

Zynq MPSoC revenues grew over 300% YOY.

These positive signals were just too positive to ignore.

Long term, the trade war complications threaten to corrode a substantial chunk of chip revenues at mainstay players like Intel (INTC) and Nvidia (NVDA).

Not only has the execution risk ratcheted up, but the regulatory risk of operating in China is rising higher than the nosebleed section because of the Huawei extradition case and paying costly tariffs to import back to America is a punch in the gut.

This fragility was highlighted by Intel (INTC) who brought the semiconductor story back down to earth with a mild earnings beat but laid an egg with a horrid annual 2019 forecast.

Intel telegraphed that they are slashing projections for cloud revenue and server sales.

Micron (MU) acquiesced in a similar forecast calling for a cloud hardware slowdown and bloated inventory would need to be further digested creating a lack of demand in new orders.

Then the ultimate stab through the heart - the 2019 guide was $1 billion less than initially forecasted amounting to the same level of revenue in 2018 - $73 billion in revenue and zero growth to the top line.

Making matters worse, the downdraft in guidance factored in that the backend of the year has the likelihood of outperforming to meet that flat projection of the same revenue from last year offering the bear camp fodder to dump Intel shares.

How can firms convincingly promise the back half is going to buttress its year-end performance under the drudgery of a fractious geopolitical set-up?

This screams uncertainty.

Love them or crucify them, the specific makeup of the semiconductor chip cycle entails a vulnerable boom-bust cycle that is the hallmark of the chip industry.

We are trending towards the latter stage of the bust portion of the cycle with management issuing code words such as “inventory adjustment.”

Firms will need to quickly work off this excess blubber to stoke the growth cycle again and that is what this strength in chip stocks is partly about.

Investors are front-running the shaving off of the blubber and getting in at rock bottom prices.

Amalgamate the revelation that demand is relatively healthy due to the next leg up in the technology race requiring companies to hem in adequate orders of next-gen chips for 5G, data servers, IoT products, video game consoles, autonomous vehicle technology, just to name a few.

But this demand is expected to come online in the late half of 2019 if management’s wishes come true.

To minimize unpredictable volatility in this part of tech and if you want to squeeze out the extra juice in this area, then traders can play it by going long the iShares PHLX Semiconductor ETF (SOXX) or VanEck Vectors Semiconductor ETF (SMH).

In many cases, hedge funds have made their entire annual performance in the first month of January because of this v-shaped move in chip shares.

Then there is the other long-term issue of elevated execution risks to chip companies because of an overly reliant manufacturing process in China.

If this trade war turns into a several decades affair which it is appearing more likely by the day, American chip companies will require relocating to a non-adversarial country preferably a democratic stronghold that can act as the fulcrum of a global supply chain channel moving forward.

The relocation will not occur overnight but will have to take place in tranches, and the same chip companies will be on the hook for the relocation fees and resulting capex that is tied with this commitment.

That is all benign in the short term and chip stocks have a little more to run, but on a risk reward proposition, it doesn’t make sense right now to pick up pennies in front of the steamroller.

If the Nasdaq (QQQ) retests December lows because of global growth falls off a cliff, then this mini run in chips will freeze and thawing out won’t happen in a blink of an eye either.

But if you are a long-term investor, I would recommend my favorite chip stock AMD who is actively draining CPU market share from Intel and whose innovation pipeline rivals only Nvidia.