While the surge in capital inflows toward artificial intelligence and other advanced innovations has resulted in remarkable performances, the ebb and flow of the market dictates a cautious outlook. Earlier this summer, some experts warned about the excessive concentration of investor funds toward a select and elite group within the S&P 500. As bubble fears escalated, tech juggernaut Broadcom Inc. AVGO had an unenviable task ahead of its third-quarter earnings report.
After semiconductor stalwart Nvidia Corp. NVDA struggled to excite investors despite delivering the goods on paper for its second-quarter disclosure, the pressure was on for Broadcom. It did not disappoint.
In its quarterly report, Broadcom posted adjusted earnings of $1.69 per share, beating out Wall Street analysts’ consensus view of $1.65 per share. On the top line, the tech giant generated $15.95 billion, rising past the expected target of $15.83 billion. Against the year-ago quarter, the sales tally jumped 22%, driven by continued strength in custom AI accelerators, networking and its VMware acquisition.
Even better, for the fourth quarter, management anticipates revenue to land at $17.4 billion, noticeably above the estimate calling for $17.02 billion. Unsurprisingly, AVGO stock popped sharply on the strong disclosure. Over the trailing one-month period, AVGO has gained more than 17%. For the year, the security is up nearly 49%, making it one of the top-performing tech stocks among mega-capitalization firms.
Of course, this tremendous success raises concerns about the sustained viability of AVGO stock. In a strange way, excessive performance can also be a technical drag on a publicly traded security. With so many investors having already become wildly profitable, a temptation exists to take some off the table. It’s here that it’s worth pointing out that in the past six months, AVGO has almost doubled in market value.
Beyond the technical risks, one must consider the broader economic risks. In particular, many experts have warned that the U.S. faces stagflation due to a weakening labor market and elevated consumer prices. Combined with the rich and concentrated valuations that AI-related enterprises command, a shock to the system could lead to a possible popping of the bubble.
The Direxion ETFs: With both sides carrying convincing arguments, Broadcom provides rich grounds for speculative endeavors. To that end, financial services provider Direxion has brought to the table two compelling products.
For the optimists, the Direxion Daily AVGO Bull 2X Shares AVL seeks the daily investment results of 200% of the performance of AVGO stock. On the other end, pessimistic traders may consider the Direxion Daily AVGO Bear 1X Shares AVS, which seeks 100% of the inverse performance of the namesake security.
Direxion ETFs have attracted retail investors primarily due to their flexibility. Usually, traders interested in more exotic strategies, such as leveraged or short positions, must engage the options market. However, financial derivatives carry complexities that may not be suitable for everyone. In contrast, Direxion ETFs can be bought and sold much like any other publicly traded security, thus mitigating the learning curve.
Nevertheless, traders participating in these funds must recognize their unique risks. First, leveraged and inverse ETFs typically incur greater volatility than funds tracking benchmark indices, such as the Nasdaq Composite index. Second, Direxion ETFs are designed for exposure lasting no longer than one day. Holding these funds longer than recommended may expose traders to value decay due to the daily compounding effect.
The AVL ETF: Since the start of the year, the AVL ETF has gained nearly 65%, with the half-year period being especially impressive due to a performance of over 171%.
- Currently, the AVL ETF appears unstoppable, with the price action firmly above the 50-day and 200-day moving averages.
- Through long stretches prior to the Q3 earnings report, trading volume has been flat to declining, raising concerns about AVL’s forward viability.
The AVS ETF: On the other end of the spectrum, the AVS ETF has caused significant pain, with the bear fund losing roughly 44% since the January opener.
- In a flipped narrative to its bullish counterpart, the AVS ETF sits well below the 50 and 200 DMAs, along with the 20-day exponential moving average.
- Volume has been minimal throughout most of this year. That said, acquisition volume appears to be picking up recently, possibly indicating greater interest in the bearish narrative.