There’s no question that Intel Corporation (NASDAQ:INTC) is a great company. Things are going very well for the famous chipmaker, having settled comfortably into Peter Lynch “stalwart” territory. However, there’s a massive problem with INTC stock behavior recently — and investors should be mindful.
Here’s a chart of the Nasdaq Composite. If you remember the dot-com bubble, then you know what this first chart shows. There was this truly insane run-up in the Nasdaq in 1999. You could not go wrong trading stocks during this period. I remember my glee as a relatively newcomer to the markets, making $70,000 that year.
The index was already going crazy in 1998. After the blowup of Long Term Capital Management, the index rose from about 1,600 to just under 3,000 in the space of a year. Then came the parabolic spike, where the index soared to 5,000 in less than five months.
Look at what happened next… or maybe you remember. I sure do. I lost exactly $70,000 in the year 2000. First came the drastic 30% correction, followed by some massive volatility, before the correction resumed and took the index right down to where it was before the parabola launched.
This wasn’t a one-shot thing; it happens all the time. It’s happened to many stocks, like Christopher & Banks Corporation (NYSE:CBK), Chico’s FAS, Inc. (NYSE:CHS) in 2005, Crocs, Inc. (NASDAQ:CROX) in 2007 and on and on.
Now, look at the chart on Ambarella, Inc. (NASDAQ:AMBA), courtesy of DecisionPoint:
And now, on to Intel:
Does this definitely mean that INTC stock is headed for a big fall? No. However, all the pieces are in place, and that means investors should be cautious. Because of the basing pattern, any drop would likely find support at around $37.
What you decide to do depends on your situation. Let’s run through them:
If You Have a Long-Term Position in INTC Stock
You are probably best off by just holding onto that position. Selling would trigger capital gains. You probably got in a very long time ago, and so this breakout is meaningless to you. You are in it for the long haul.
If You Bought INTC Stock Before the Breakout
You are effectively in the same position as the long-term holder. You could go one of two ways. You could just hold onto INTC stock, especially if you are thinking about holding it for the long term.
Alternatively, you could grab some short-term profits now. If Intel stock falls back to $37, then you nabbed some quick cash. You can buy back in at any time. If INTC stock doesn’t correct back to $37, you can also put in a buy stop or you could set a stop loss in the low-to-mid-$40’s to split the difference.
If You Bought INTC Stock After the Breakout
You’d be wise to take profits, or at the very least, set stop losses. If you got in at anywhere over $40, you are really rolling the dice that whatever gains you have will hold.
The key difference between INTC right now and the other stocks I’ve mentioned, and most stocks that form parabolic patterns, is that INTC is a solid company. Even if the stock falls, it will recover and, over time, likely rise above its present position.
The Nasdaq took 15 years for that to happen. I doubt INTC would take that long.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at [email protected].