AMD's Stock May Plunge Into A Bear Market

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of TSLA.)

Advanced Micro Devices Inc.'s (AMD) stock already has plunged 11% off its 2018 highs - and the worst may not be over. AMD is poised to fall an additional 12% from yesterday's closing price, according to a technical analysis, which would push the shares down more than 20% off their highs into a bear market. 

That dark outlook amounts to a huge reversal. The shares soared in recent months after Intel announced delays in the production of its 10-nanometer chip. But trouble started on Friday for AMD when Intel Corp.(INTC) announced it was making progress on its 10-nanometer chip and was investing an additional $1 billion in capital expenditures to meet customer demand. ( See: Intel Traders See Stock Rising 8% Amid Raised Forecasts.)

A 12% decline in AMD would be greater than some analysts have recently forecast. (See: AMD Less Attractive on ‘Rich’ Valuation, Pressure from Intel: Baird.) 

AMD Chart

AMD data by YCharts

Breaking Down

Technical charts show that shares of AMD have now dropped below critical technical support at $29.40. The next level of significant support doesn't come until $25.70. The stock has been trending lower since peaking at technical resistance of around $34.50, a price the stock has not seen since 2006.

The relative strength index (RSI) also is trending lower after hitting overbought levels of almost 87 in the middle of September. It is the second time the RSI has hit such a high level since early June. The RSI is now around 50 and would still need to fall to 30 before hitting oversold conditions. Volume levels have been increasing on down days which suggests a rising number of sellers. 

Short Interest Rising

Short Interest in the stock also has risen to 152 million shares as of the start of September, and it represents almost 16% of the shares outstanding, an elevated level. For example, Tesla Inc. (TSLA) which is another highly shorted stock, has about 20% of its shares outstanding, where Intel is at less than 2%.

AMD Percent of Shares Outstanding Short Chart

AMD Percent of Shares Outstanding Short data by YCharts

Expensive Stock

AMD is the most expensive of the top 25 holdings in the iShares PHLX Semiconductor ETF (SOXX). At a 2019 PE ratio of nearly 43, it is more expensive than Nvidia, which is trading at a PE of 33 and the second most expensive stock. AMD’s stock has been on a parabolic rise over the past few months on hopes it can take business from Intel. Now that Intel is on the offensive, AMD's stock may be forced to retreat even further.

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 holdingsInformation 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.

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