This has been an epic year for the stock markets. It has been extremely tumultuous thanks to a plethora of headlines creating extreme moves in both directions. At the heart of the battles are the chip stocks, especially Advanced Micro Devices (NASDAQ:AMD). In the summer it rallied 160% while the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) was in a sideways seesaw.
But then the October market-wide correction happened and took down all stocks. The SMH fell 20% but AMD stock fell 50%. The faster and bigger the rally, the bigger the fall. Luckily I had shorted it in the middle of September so I come into today’s write up with profits in my pocket.
Before you label me a perma-bear or a hater, recently and after the hideous reaction to earnings I shared a bullish setup suggesting a big upside potential after the plummet. That trade turned out to be perfect timing on October 31st. Since then AMD stock has rallied more 40% to filled the gap.
So is it too late to start chasing it now? No. First, the macroeconomic conditions still favor the bullish thesis for semiconductor stocks. And second, AMD is still poised to prosper within it.
This week’s panic selling in stocks caused tremendous damage. But this also shed a lot of froth out of the AMD post earnings rocket rebound. It is normal to get a halfback dips after big rallies. Besides AMD’s fall this week was not to a specific problem of its own. There were strange system-wide sell programs most likely emanating from the Bond and Currency markets.
Fundamentally, AMD is not cheap. It runs at a loss and with a 33 price-to-book ratio. This is almost three times that of Nvidia’s (NASDAQ:NVDA) and ten times that of Intel (NASDAQ:INTC). So buying expensive stocks requires faith in their future. We will need AMD parts for years to come as we now need technology for every aspect of our lives. And the adoption rate of it is exponential.
Trading AMD Stock
This is a momentum stock and those are difficult to trade. Even after all these corrections when the S&P 500 is struggling to stay flat, AMD stock is still up 93% this year. Momentum stocks run fast in both directions so they rarely give a clear entry point. But late October I shared a long entry because it hit solid support.
The opportunity from here is two fold: First, the headline threats diminished since the tariff war is on hold and the U.S. Fed admitted it’s close to its rate hike goals. Second, AMD stock has a technical breakout opportunity just above current levels.
If the bulls can beat $22 per share then $23.80, then they have a real chance at retesting $29 per share. It will need help from the general markets and also hold its recent lows.
This week we have had a spike in uncertainty but nothing tied to an obvious trigger. Theories about the causes include the arrest of the Huawei CFO and the yield curve. These too shall pass.
The Fed can and will stop short from inverting the yield curve. Otherwise, economists believe that within a year of the inversion, we would get a recession. Next, the Huawei situation is not going to derail the China/U.S. tariff talks.
The AMD management team has the confidence of Wall Street experts. I am confident that they can continue to attract buyers. The stock has established the support and it has since used it to set higher lows. Bulls can use that as a base to regain summer glory.
Most analysts are on hold with the stock while it still trades below their average price targets. This reduces the odds of a surprise downgrade. In fact, it increases the odds of an upgrade at the first hint of good news.
Coming into the last earnings period, there was too much love for the AMD stock. It was impossible for the report to live up to its expectations. And that was the reason for my bearish trade. Now there are better things to come for Advanced Micro Devices.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
