Options Corner: This Statistical Signal Just Revealed A Mispricing For Marvell Technology

Circumstances don't look particularly appealing for semiconductor stocks, with a key projected focused on artificial intelligence getting off to a rocky start. Just six months after the announcement of the $500 billion Stargate initiative — a joint venture between OpenAI and SoftBank to bolster AI infrastructure in the U.S. — the project has run into major delays and scaled-back ambitions, hurting companies such as Marvell Technology Inc MRVL. Still, this could be an intriguing discount for adventurous contrarians.

On the surface, the pessimistic headlines aren't exactly clamoring for a bullish position in MRVL stock. Although the Stargate venture launched with a flashy debut at the White House, including vows of an immediate investment of $100 billion, the project has yet to secure a single major data center deal. Instead, it will now focus on building a much smaller facility in Ohio by year's end, with the partners struggling for consensus on key terms.

With generative AI representing a massive topic in recent years, the Stargate news is conspicuous for its broadly negative implications. Should demand for machine intelligence not meet expectations, the multiple billions of dollars poured into advanced semiconductors would come under serious questioning. Subsequently, MRVL stock dipped more than 1% earlier in the morning. It wasn't the only name, with even mighty Nvidia Corp NVDA slipping roughly 2% on Tuesday.

Despite the overhang, the red ink could present a discounted opportunity for contrarian investors. No, the Stargate stumble isn't helpful; it's a reality check for the broader tech industry. Nevertheless, it's also important not to lose sight of the bigger picture. Per Morgan Stanley, generative AI revenue could surpass $1.1 trillion by 2028, presenting significant potential for growth.

A Compelling Signal Flashes Again For MRVL Stock

Although there's a common adage among market participants to buy when there's blood on the streets, this is also a useless phrase if you think about it. Yeah, sure, be greedy when others are fearful — but which ideas should we be greedy upon?

Of course, my argument is that MRVL stock should be the candidate of your avarice — and I'm going to present an empirical justification for it.

Fundamentally, we must find the statistical turning points of MRVL stock by deciphering its patterns of intentionality. It's here that perhaps 99% of the financial publication industry dives straight into fundamental or technical analysis. But the vulnerability of these methodologies is that they incorporate continuous scalar signals, such as earnings or share price.

These metrics represent the key language of finance so how can they be a problem? The answer is that they're unbounded so mathematically or scientifically, they cannot be defined. For example, there's no objective standard for what a "good price" is or what "bad earnings" means.

What is objective is market breadth, the sequences of accumulative and distributive sessions. At the end of the day, the market will be a net buyer or a net seller. Converting the chaos of price discovery into a binary language makes it tremendously easier to decipher recurring patterns — and more importantly, how these patterns transition from one state of existence to another.

Conducting the above exercise for MRVL stock across rolling 10-week intervals (since January 2019) gives us the following demand profile:

L10 Category	Sample Size	Up Probability	Baseline Probability	Median Return if Up
1-9-D	1	100.00%	50.88%	3.08%
2-8-D	8	50.00%	50.88%	2.18%
2-8-U	1	100.00%	50.88%	0.34%
3-7-D	30	53.33%	50.88%	6.50%
3-7-U	5	60.00%	50.88%	2.81%
4-6-D	44	54.55%	50.88%	5.88%
4-6-U	29	62.07%	50.88%	4.19%
5-5-D	30	40.00%	50.88%	5.50%
5-5-U	42	42.86%	50.88%	2.81%
6-4-D	11	45.45%	50.88%	9.79%
6-4-U	61	50.82%	50.88%	2.93%
7-3-U	35	42.86%	50.88%	4.65%
8-2-U	12	66.67%	50.88%	7.35%
9-1-U	2	0.00%	50.88%	N/A

In the trailing two months, MRVL stock is printing a "4-6-U" sequence: four up weeks, six down weeks, with a positive trajectory across the 10-week period. It's an unusual sequence as the balance of distributive sessions outweighs accumulative, yet the trajectory of MRVL is positive.

In 62.07% of cases, the following week's price action results in upside, with a median return of 4.19%. Should the bulls maintain control over the next four weeks, a median performance boost of 1.65% could be tacked on. With MRVL stock trading at around $72 at time of writing, the security could potentially be on course to rise over $76.

Essentially, Marvell stock may be favorably mispriced. Ordinarily, the one-week upside probability on any given week is around 51%, which is the null hypothesis (the assumption of no mispricing). What I'm saying here is that the odds may decisively favor the optimistic speculator.

Taking A Shot With Marvell Options

Those interested in diving into Marvell may consider the 74/75 bull call spread expiring Aug. 15. This transaction involves buying the $74 call and simultaneously selling the $75 call, for a net debit paid of $47 (the most that can be lost in the trade). Should MRVL stock rise through the short strike price ($75) at expiration, the maximum reward is $53, a payout of almost 113%.

To be sure, the window of profitability above is tight, with the breakeven price at $74.47. But with nearly four weeks until expiration, the $75 target is rational based on past analogs. It's worth pointing out that in June, the aforementioned statistical signal flashed, leading to robust upside.

Running a one-tailed binomial test on the 4-6-U sequence reveals a p-value of 0.15, which loosely translates to an 85% confidence level that the sequence is "intentional" rather than random. From a scientific standpoint, this doesn't meet the 95% threshold of statistical significance. However, I would argue that given the stock market's open system and entropic nature, an 85% confidence level is empirically intriguing.

With MRVL stock previously demonstrating the power of this statistical signal, the semiconductor industry's pessimistic headlines could be a chance to get in for cheap.

The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.

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