(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
The chip sector has been among the hottest groups in the stock market so far in 2018, with the iShares PHLX Semiconductor ETF (SOXX), a proxy for the industry, up by nearly 10 percent on the year. But the group has fallen on hard times recently, with the ETF down about 5 percent since March 12. But stocks such as Intel Corp. (INTC) and Applied Materials Inc. (AMAT) could be set to decline by a total of 11 percent or more from their intraday highs last week.
Both stocks have had big runs along with the sector, with Applied Materials rising by nearly 17 percent, and Intel increasing by almost 11 percent in 2018. But these two stocks have not been unscathed during the recent downdraft in the broader industry and may be vulnerable.
The Chip Sector
The Semiconductor ETF has declined by nearly 6 percent from its recent highs of almost $199, and is trading around $186.50. There is a risk that the ETF could continue to fall to nearly $181, with the potential to suffer a total loss of almost 9 percent from the peak, should the sell-off stop at the next support level.
Intel is also at risk of falling further to roughly $47.50, a drop of nearly 11.5 percent from its intraday high around $53.80 on March 13. The stock is currently trading above a technical support level at approximately $50.90. Should the stock break that technical level, a further decline could take hold. The next level of support comes around $47.40, which also intersects with a longer-term uptrend. Combined, the two could offer Intel a stable base for shares to regroup. (See also: Inside Intel: A Look At The Mega Chipmaker.)
Applied Materials shares have also declined sharply since its intraday high around $62.40 on March 12, a fall of about 5 percent to its current price of approximately $59.60. Like Intel, it is quickly approaching a critical technical support level at roughly $57.50. Should the stock fall below that, it could trigger a much sharper decline.
The long-term uptrend in Applied Materials comes into play in the range of $54 to $55.50 depending on how fast or slow the stock falls if support at $57.50 is broken. This would result in shares dropping an additional 9 percent from its current price, and a total of nearly 13.5 percent from its intraday high.
These are critical levels for Intel, Applied Materials, and the Semiconductor ETF. Should the prices fall below those vital points, more pain may lie ahead. But if the stocks can stay above those technical levels, the declines can be avoided. (See also: Fidelity Investments Fund Manager Bullish on Tech Stocks Thanks to AI.)
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.