After AMD’s 15% surge, chip stocks cement their status as the craziest sector right now

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Michaela Rehle | Reuters

Investors are grappling to understand what’s taking place in the wild semiconductor sector. The group is bouncing in a wild ride, but many investors warn the volatility could be a signal of more earnings weakness to come this year.

“Semiconductors are the very definition of cyclicals so they got absolutely pounded when the market rolled over in December,” said Daniel Niles, founding partner of AlphaOne Capital Partners.

The VanEck Vectors Semiconductor ETF, up 1.5 percent Wednesday, is up 18 percent from its Dec. 24 low. On Dec. 24, it was down 29 percent from its 52 week high in March. AMD alone is 34 percent above its December low. The shares were down more than 50 percent from its September high.

Companies “either missed the quarter, they lowered guidance or in most cases both. The majority of the stocks went up. You see this pretty frequently when investors are trying to call the bottom. With semiconductors having come down a lot over the course of the last year, it’s pretty normal. You have to ask yourself whether the earnings revisions are over. I don’t think they are,” said Niles.

But that hasn’t stopped investors from jumping in.

“The semis had looked washed out on valuation a few weeks back and now they look kind of middling,” said Lori Calvasina, chief U.S. equities strategist at RBC. “I think that group had going for it is it got de-risked early. What I’m hearing from investors is it probably is a quarter or two too early fort he semis, but we’re going to nibble now. I think a lot of people went in earlly and you had that big draft upwards. I’m sort of neutral right now. I would say I was more positive a few weeks ago.”

Despite AMD’s stock rally, analysts were questioning its revenue forecast, noting the guidance was very aggressive. While it expects improved margins and higher revenues for the year, it expects a slump in current first quarter revenue of $1.25 billion, a drop of 24 percent from last year.

“…the controversy will now undoubtedly hinge upon the achievability of that full year guide, which requires a back-half ramp that would make Evel Knievel nervous,” wrote Bernstein analysts.

Baird analysts said the AMD outlook was aggressive, and they instead expect flat revenues for the year.

Some of the warnings from the sector have been macro in nature.

Cloudy picture

Intel’s interim CEO, Robert Swan, told CNBC last week that a number of global concerns are leading his company to reduce its 2019 outlook.

“Some geopolitical dynamics … are going to weigh on ultimate consumers and enterprise desires to buy, and that’s whether it’s U.S.-China trade, whether it’s the U.S. government shutdown, whether it’s Brexit,” Swan said on “Squawk Alley.” “As we enter 2019, we just see a little bit of cloudy macro and geopolitical dynamics.”

Intel stock was rising Wednesday, along with the sector though it is down 2.2 percent in the past week. NVIDIA fell hard on its lowered forecast, and is down 9.8 percent in the past week, while up 2.3 percent Wednesday.

Texas Instruments, KLA-Tencor, Micron and Xilinx were all trading higher.

“You’re going into the weakest season for end demand. That’s the March quarter. That’s when you’re going to have customers burning off any inventories they had,” said Niles. “You have a lot of customers buying products in advance of the off-chance that tariffs for China went up from 10 to 25 percent. You have customers sitting on more inventory than they normally would.”

Trade negotiators for the U.S. and China are working towards a agreement by March 1, or new tariffs would go into effect. Niles also said an earlier Chinese New Year this eyar, starting Feb. 5, has also likely pulled business activity forward, making China sales appear better than they are.

“It’s making demand look stronger than it should because demand is getting compressed into January,” he said. “If you listen tot he companies themselves, most of the companies have not said this si the bottom, things are improving. Most of them are saying by the time we get to mid–year, we will be through the worst of it and things should get better.”

Niles said he expects the demand softness to show up after Chinese New Year’s, and that could drive stocks lower.

“I’m back to looking for shorts. There’s a few things that might make interesting longs, but in general when you look at this grop widley, there’s very few things you can be optimstic on at this point form an end demand basis,” Niles said. “On Dec. 24, the risk reward was in our favor.”

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