In my last article, I discussed the early earnings and cautioned against letting your guard down and chasing the market higher. If you look at the recent trading volume, you can see it continues to be on the light end despite the fact that the equities market is moving higher.
While I would not call this a “sucker’s rally” in the equities market, you should be careful. Rather than adding new positions, I would advise taking some profits on some of your bigger winners. This strategy of active portfolio management in the equities market makes sense, given the existing global risk.
While the big banks are providing some leadership to the equities market, an area that needs help is technology and growth stocks. The problem is with companies around the world facing spending cuts from businesses and individuals; we are seeing a corresponding cut in technology spending especially in the semiconductor equities market.
In the equities market, the Semiconductor Index shows the downward movement since the beginning of 2011. The chart shows a potential bearish “pennant pattern” that points to the convergence of the upper and lower trendlines, followed by a possible decline to the 200-day moving average (MA), based on my technical analysis.
Chart courtesy of www.StockCharts.com
Two of the top chipmakers in the equities market are both expressing caution on the global economy and growth.
Chipmaker Advanced Micro Devices, Inc. (NYSE/AMD) made a downward revision in its third-quarter revenues to below consensus, citing the global economy as the reason. For the third quarter, which will be reported after the markets close today, Advanced Micro Devices (AMD) said revenues would contract 10% on a sequential basis. The decline is worse, given the previous guidance by AMD, which had estimated revenue growth would fall a maximum of four percent or grow a maximum of three percent. (Source: “AMD Announces Preliminary Third Quarter Results,” Advanced Micro Devices, Inc., October 11, 2012.) My concern is that the wide revenue range previously offered by AMD clearly suggests the company is uncertain about the operating climate.
The expected weakness in AMD is not company-specific, but it appears to be more of an industry-wide slowdown. The superlative growth of tablets and other mobile devices is one cause for the slowdown.
Intel Corporation (NASDAQ/INTC) managed to beat consensus earnings, but only after Wall Street lowered its estimate. Revenues came in at $13.5 billion, which beat on its revenue estimate of $13.2 billion. The problem was that revenues only beat the lower target and were short of the initial guidance of between $13.8 billion and $14.8 billion. Citing the uncertainties of the global climate as the cause, Intel also warned to expect weaker fourth-quarter revenues. (Source: “Intel Beats Lowered Q3 Expectations,” Yahoo! Finance from Zacks Investment Research, October 16, 2012.) The reality is that Intel is facing tough times in the equities market, as the computer industry shifts to tablets and many mobile devices are not using Intel chips. (Read “Trust Me: Declining PC Demand Is Killing Chip Stocks.”)
For success in the equities market, AMD and Intel must adapt to the new realm of mobile technology and focus on making chips for the next generation of tablets and smartphones.