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May 17th 2023
Artificial Intelligence Enters The Food Wars
For those of us reading about looming recessions, the banking crisis, and now the debt ceiling deadline, it might be difficult to believe that we have an entire sector of that market that just made a new 9-month high!
Communication Services and Technology have been out-performing the competition over the last 3-month and 6-month time frames.
While there are certain stocks that are making up the majority of those moves, you’d certainly be doing ok investing in the broader technology index. The Nasdaq 100 (QQQ) has been on a nice run since the end of last year and just made a new 9-month high yesterday while the rest of the market sold off into the close.
Why is Tech doing so well right now?
It’s partly due to the market applauding the industry-wide layoffs and removing wasteful spending on riskier projects, like the Metaverse.
It’s partly due to the financial cycle that says Tech tends to lead the market out of bear markets because it’s technology that allows companies to work more efficiently, therefore increasing revenue while decreasing costs when companies need it most.
And the last part is the hype (or maybe over-hype) around artificial intelligence. I’ve mentioned on more than one occasion that a company that mentions the phrase AI will see a lift in share prices.
At a live event last year, I mentioned McDonald’s (MCD) is a market leader in testing out new technology that will dynamically change the drive-through menu based on artificial intelligence predicting the most likely items people are going to order at that location at that time of day and year.
And now Wendy’s just announced they are looking to overhaul their drive-through experience using artificial intelligence. Wendy’s is piloting Google (GOOG/L) Cloud’s generative artificial intelligence technology with the goal of creating a quicker and more consistent drive-thru ordering experience.
Let’s see if Wendy’s (WEN) can hold the $23.50 level and bounce higher from here.
We don’t know if this version of artificial intelligence is a fad or something that will truly disrupt industries for decades to come, but if you want to trade with the trend, it’s in technology, and more specifically, it’s in companies dealing with artificial intelligence.
I’ll wrap up this part by saying that while the news doesn’t sound great and there are plenty of good reasons to be cautious in the market, there are trading opportunities out there if you stick with the hot sectors.
The stock I’m looking at over the next ten weeks is Amazon (AMZN). Over the next 10-week period, Amazon on average has historically risen by 13.7% based on the last 25 years of data. They have risen in 20 of the last 25 years over the next 10-week period, giving it a historical accuracy of 80%!
In other words, that’s an average gain of greater than 1% gain per week with a historical win rate of 80%.
The next key level to clear is just over $120, but that’s still 6% away. And despite retail sales disappointing yesterday, the one place everyone still shops is Amazon.
So, how to trade it? There are many ways you can use options. One would be going out to the AUG monthly expiration and buying an at-the-money long call. The 18 AUG $110 call is going for about $10.75 (or $1075).
Another way is to trade it as a put credit spread. The 18 AUG $95/$80 put spread is going for around $1.43 (or $143 in credit per $1378 set aside in margin).
If you’re going the credit route, I think you can look for shorter-dated options to boost your return. Possibly short puts or even put spreads, but trading out a month at a time.
The question is – how would YOU trade it?
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Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab
Any trade or trade idea discussed is for educational purposes only. They will not be tracked as an official trade recommendation.
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