Micron Technology Stock Finally Looks Like a Contrarian Opportunity

As one of the strongest benefactors of surging artificial intelligence data center infrastructure demand, Micron Technology (MU) has easily attracted investor interest. However, some of that enthusiasm suffered a dent in recent sessions. Yes, MU stock remains a 64% Buy, per the Barchart Technical Opinion indicator. However, it’s difficult to overlook the red ink.

Since its closing high in late June, Micron stock has dropped more than 23%. Psychologically, MU is now trading firmly below the $1,000 threshold, raising a warning sign to outside observers. It’s not just technical pressure either. While DRAM and NAND prices continue to rise, notes Google Finance, memory pricing momentum is expected to slow down over the next year.

As such, legitimate concerns exist regarding margin compression for MU stock. Fundamentally, some may question whether Micron can sustain its massive recent earnings growth rate.

It’s also fair to say, though, that the general consensus is rather positive. Thanks to blockbuster earnings and strong guidance for the next quarter, there’s a very real case that MU stock can brush off its recent funk. If that’s the case, considering a bullish position now may be an intriguing strategy.

What really makes the argument stick in my opinion is the quantitative narrative. It’s quite rare to see Micron stock suffer extended periods of negative weekly sessions. When this circumstance does arise, however, the tendency is for MU to enjoy a near-term bounce.

Should this trend continue, a case exists for MU stock to reach the $1,000 level around mid-October. Under this framework, the 980/1000 bull call spread expiring Oct. 16 could be in play. However, this trade carries a significant risk in that it’s probabilistically unlikely.

How, then, should we approach Micron stock? It’s helpful to understand where these probabilities originate.

Why a Random Walk Might Not Fully Explain MU Stock

On the surface, the aforementioned 980/1000 bull spread appears tempting. If there is a legitimate argument for Micron stock reaching $1,000 by mid-October, MU could potentially trigger the second-leg strike price at expiration. Doing so would convert the $915 net debit (cash outlay) into a maximum profit of $1,085, a payout of roughly 119%.

Unfortunately, the retail trader buying this spread is at a disadvantage. The breakeven price for the trade comes in at $989.15, which is slightly more than 6% above Friday’s close. Further, the implied volatility (IV) of the Oct. 16 options chain sits at 60.62%, which is conspicuously lower than the historic volatility of 89.43%.

Basically, all the transactional data from the derivatives market reveals that the anticipated movement of Micron stock is likely to be less than what would normally be expected at this time of the year. Thus, the probability of profit (breakeven) is set at a modest 39.5%. If you reverse engineer Barchart’s Expected Move calculator, you’ll find that the odds of MU hitting the $1,000 strike at expiration is only 33.83%.

That sounds problematic because of the classic expected value (EV) calculation. If you ran the above spread across multiple parallel universes, you would end up losing more money than you gained. Because your full win rate is less than 34%, the 66% full loss rate means that the max payout of less than 119% won’t be enough to tilt the math in your favor.

However, these probabilities are based on an assumption that MU stock will undergo a random walk between now and the expiration date, with the previously stated IV representing a constant “fuel” across the journey. While the actual math is neat and tidy, the assumption that contextualizes the math might not be accurate.

Defending the Nonrandom Walk Argument of Micron Stock

Rather than a random walk governing the forward trajectory of MU stock, I’m a believer that it will undergo a nonrandom walk. My defense centers on Micron’s quantitative structure. In the last 10 weeks, MU managed to only print three positive weekly candlesticks, leading to a downward slope across the period. Historically, this 3-7-D sequence has typically led to a positive response.

To be sure, I’m making an inductive argument, which is open to the risk that the observed historical pattern may not necessarily materialize in the future. Still, I’m quite confident that the ensuing result — whatever it may be — will be nonrandom.

It’s no secret that many traders observe extensive downturns of strong, relevant stocks as potential buying opportunities. If that bias is consistently evident (as the historical data shows), then Micron stock should exhibit nonrandom behavior. And this observed nonrandomness may mean that the $1,000 price target is in play.

Of the 30 times that the 3-7-D signal flashed on a rolling basis since January 2019, MU stock has exceeded the equivalent of the $1,000 price target 15 times between the sixth and seventh week of the sequence materializing. From an observational standpoint, then, the odds of hitting the second-leg strike may be 50%.

Now, 50% isn’t all that great but because of the roughly 119% max payout, the 980/1000 bull spread should theoretically demonstrate positive EV. That would make a previously irrational trade more rational.

Closing Caveat

Unfortunately, there’s no way to forecast movements in the equities market with high confidence. In a bid to find a meaningful signal, you’re often left searching for rare markers. Well, their rarity naturally means that small sample sizes represent the cost of doing business. If you find a signal with a large sample size, chances are, you’re dealing with noise, not signals.

It’s also worth mentioning that markets are reflexive. Because valuations respond immediately to shifting fundamental, technical and even mechanical circumstances, it’s extraordinarily difficult (if not impossible) to make deterministic claims.

As such, we’re really left with inferring where a security may go. For me, that involves inductive reasoning. It’s an imperfect methodology but it may be the best philosophical tool we have in a non-deterministic system.