You Have to Be Careful With Semiconductors (Intel Included)

Key Concepts

• SOX ETF (Semiconductor ETF): An exchange-traded fund that tracks the performance of semiconductor companies.
• SMH ETF: Another semiconductor ETF, heavily weighted towards Nvidia, leading to higher volatility.
• Elliot Waves and Fibonacci Levels: Technical analysis tools used to predict potential future price movements of stocks or ETFs.
• Moving Averages (8-day SMA, 21-day EMA, 50-day SMA, 200-day SMA): Technical indicators used as "trip wires" to identify potential trend changes and support/resistance levels.
• Fibonacci Extension: A technical analysis tool used to identify potential price targets based on previous price movements.
• Resistance Level: A price point at which selling pressure is expected to overcome buying pressure, preventing further price increases.
• Source of Funds / Use of Funds: A concept in investment rotation where capital is moved from an overperforming sector (source of funds) to an underperforming sector (use of funds).
• Reshoring: The practice of bringing manufacturing or other business operations back to the home country.
• 18 Angstrom Plant: Intel's most advanced manufacturing node.
• Venture Capitalist CEO: A CEO with experience in venture capital, suggesting a focus on capital markets and operations.

Semiconductor Sector Analysis (SOX ETF)

The discussion begins by analyzing the SOX semiconductor ETF as a proxy for the broader semiconductor market, rather than focusing solely on Intel. The SOX ETF is described as "pretty well balanced" among top vendors, contrasting it with the SMH ETF, which is heavily weighted to Nvidia and thus more volatile.

Key Observations and Data:

• April Lows: The SOX ETF hit a low of 148 on April 7th, coinciding with the broader market bottom post-liberation day.
• Presidential Tweet Signal: A "famous presidential tweet" is cited as a signal for a buying opportunity, highlighting the administration's tendency to provide market signals.
• Significant Run-up: Following the April low, the SOX ETF experienced a substantial rally. It moved from 162 to 290 in approximately six months, from around April 22nd to October 23rd. This represents a remarkable increase.
• Current Price and Resistance: As of October 23rd, the SOX ETF is trading around 290. It has been struggling to break above the 292 level since October 6th, failing to sustain a daily close above it for over two weeks. This indicates strong resistance at this price point.

Arguments for a Potential Top in the Semiconductor Sector:

1. Fibonacci Extension: The sector has reached a significant Fibonacci extension, specifically a 3.68 extension on wave three, which is considered a large upward move.
2. Failure to Break Resistance: The inability to consistently break above 292 for over two weeks suggests a lack of significant buying interest at higher levels. This resistance level implies that buyers of any size are not present above 292.

Possible Scenarios:

• Consolidation: The sector might enter a period of sideways trading before another potential upward move.
• Turn Down: The sector could begin to decline, not due to a market collapse, but because investors are taking profits after a substantial run-up and rotating capital into other sectors.

"Source of Funds" vs. "Use of Funds" Concept:

The speaker introduces the concept of "source of funds" and "use of funds" in the context of investment rotation. When a sector like semiconductors has experienced a significant run-up (from 148 to 290), it can become a "source of funds." Investors may then move capital out of this sector and into sectors that have not performed as well, such as enterprise software, which is described as a potential "use of funds." Many software stocks are currently "beaten up" due to fears of AI replacement.

Technical Indicators and "Trip Wires":

The analysis utilizes moving averages as "trip wires" to monitor potential trend changes:

• 8-day Simple Moving Average (SMA) (Red Line): If the price crosses below this line from above, it's a signal to "have your antenna up and be concerned."
• 21-day Exponential Moving Average (EMA) (Green Line): If the price crosses below this line from above, it's a signal to "be concerned."
• Rule of Thumb for 21-day EMA: Two daily closes below the 21-day EMA are considered a signal to be "truly cautious," suggesting taking profits, reducing exposure, or hedging.

The speaker notes that the SOX ETF has crossed below the 8-day SMA a couple of times and is currently approaching the 21-day EMA. The possibility of the semiconductor sector "rolling over" is considered, with the speaker acknowledging having thought this might happen earlier.

Intel Corporation Analysis

The discussion then shifts to Intel, with the speaker recalling a past assessment of Intel as a potentially great opportunity due to the trend of reshoring semiconductor manufacturing back to the US. However, this was deemed to be "about 18 months too early."

Government Policy and Intel's Role:

• Reshoring Initiative: The current administration's policy aims to reshore semiconductor manufacturing capabilities to the US.
• Intel as a Vessel: Intel is seen as a "vessel" for this policy, implying that the government is using Intel to achieve its goal of domestic semiconductor production. This is described as having a "state-owned enterprise" behavior, even with a 10-5% ownership stake.
• Policy Examples: The speaker points to China policy regarding Nvidia exports, domestic policy on Intel capital investment, and encouraging third-party investment in Intel as evidence of this strategy.
• US Semiconductor Excellence: Intel is positioned as a vehicle for achieving "US semiconductor excellence."

Uncertainty of Government-Driven Companies:

While acknowledging the government's policy direction, the speaker expresses skepticism about the historical success of governments driving companies. The question remains whether this strategy will translate into a successful operating business.

Potential Upside for Intel Stock:

Despite the fundamental challenges, the stock price of Intel could potentially continue to rise.

• 18 Angstrom Plant Success: Intel appears to be having some success with its 18 angstrom plant, its most advanced node.
• Political Expediency: For political reasons, many vendors may coalesce around Intel for chip fabrication, which could provide upside for the stock.

Fundamental Challenges for Intel:

The speaker highlights significant fundamental weaknesses in Intel:

• Slow Turnaround: It is too difficult to quickly turn around a company of Intel's size.
• Current Business Performance: Intel is not currently a "great business."
• Poor Growth: Growth is described as "poor and non-existent."
• Terrible Cash Flow: Cash flow generation is a significant issue.
• Stretched Balance Sheet: The balance sheet is under pressure.

The CEO's Role and Future Potential:

The speaker questions whether Intel can become the type of business people hope it can be.

• Holding Company Potential: It is suggested that Intel could potentially function as a successful holding company, given its CEO's background as a venture capitalist skilled in capital markets operations.
• Manufacturing and Design Business: Becoming a successful, cash-generative manufacturing and design business again is considered a "much higher hurdle."

Conclusion on Intel Stock:

While personally not betting on Intel becoming a fundamentally strong manufacturing and design business again, the speaker believes the stock "can go up."

Synthesis and Conclusion

The analysis of the semiconductor sector, represented by the SOX ETF, suggests a potential turning point. After a remarkable six-month rally from a low of 148 to around 290, the sector is facing significant resistance at 292 and has reached a substantial Fibonacci extension. This, combined with the potential for profit-taking and rotation into underperforming sectors like enterprise software, indicates a possibility of the sector topping out. Technical indicators like moving averages are being closely watched as "trip wires" for potential trend reversals.

Regarding Intel, the company is viewed through the lens of government policy aimed at reshoring semiconductor manufacturing. While Intel is being utilized as a vehicle for this initiative, and its stock may see further upside due to political expediency and potential success with its advanced manufacturing node, its fundamental business performance remains weak, characterized by poor growth, terrible cash flow, and a stretched balance sheet. The long-term success of Intel as a manufacturing and design business is questioned, though its potential as a holding company under its venture capitalist CEO is acknowledged. The overarching takeaway is that while the semiconductor sector may be showing signs of topping, Intel's stock could still move higher, driven by factors beyond its core business fundamentals.