Chips and dips

03/25/21
  • Intel (INTC) announced plans to launch new chip-production facilities
  • Leading global chip manufacturer TSM initially dropped on news
  • Potential for “news reversal”?

Traders wondering why chipmaker Intel (INTC) was up more than 6% early yesterday morning while Taiwan Semiconductor (TSM) was down nearly 5% probably shut down their trading screens shortly after the closing bell rang on Tuesday.

That’s when Intel announced it intended to invest billions in new “foundries” that would produce chips for other semiconductor companies, as well as its own.

If that bit of news doesn’t resonate with you, it’s probably because one of the overlooked aspects of the semiconductor industry is that most “chipmakers” are really chip “designers” who farm out the physical production of their wares to other companies, with Taiwan Semiconductor (TSM) being—by far—the biggest player in this space.1

Intel effectively announced there was a new kid on the chipmaking block—or, more accurately, there would be one in a few years, which is how long it’s expected to take the company to ramp up production.2 The following five-minute chart shows both stocks initially reacted in predictable fashion to the news—INTC jumping and TSM falling, price action that bled into Wednesday morning:

Chart 1: Taiwan Semiconductor (TSM) and Intel (INTC) and, 3/22/21–3/24/21 (5-minute). Intel (INTC) and Taiwan Semiconductor (TSM) price chart. Initial reaction to news.

Source: Power E*TRADE


Regardless of how this price action shakes out in the long run, the episode provides some excellent real-time insights into how news shocks sometimes unfold.

If the fact that by midday Wednesday INTC had gone negative for the day (while TSM was holding steady) wasn’t enough to suggest that the market’s initial reaction to the news may not have been its final verdict, the market provides many examples of similar “disrupter” events—sell-offs in certain stocks when a challenger announces its intention to muscle in on established turf. For example, check out “Potential cure for a news shock,” which details the trajectory of Walgreen’s (WBA) shares after Amazon AMZN launched its prescription drug service.

In other words, the historical record suggests the initial reactions to some news shocks are “overdone” in the near-term, which may offer opportunities for traders who expect the previous status quo to reassert itself at some point.

Chart 2: Taiwan Semiconductor (TSM), 12/14/20–3/24/21. Taiwan Semiconductor (TSM) price chart. Bear trap?

Source: Power E*TRADE


The above chart shows Wednesday’s sell-off knocked TSM out of the bottom of its recent trading range, something TSM bulls may see as a potential “bear trap”—that is, a sharp consolidation breakdown that causes longs to bail out of positions and entices short sellers to pile on, only to quickly reverse to the upside, forcing those shorts to rush to the exits.

Even if TSM continues to decline in the near term (again, the WBA-AMZN episode may be worth reviewing), traders and investors who think this week’s chip industry “bombshell” wasn’t so explosive after all may be looking for former trends to re-emerge.

Every situation is unique, of course, but it always takes a little while for the markets to fully digest news.

Today’s numbers (all times ET): Final Q4 GDP (8:30 a.m.), weekly jobless claims (8:30 a.m.).

Today’s earnings include: Progress Software (PRGS), Momo (MOMO).

Today’s IPOs include: Vizio Holding (VZIO), Olink Holding (OLK), Diversey Holdings (DSEY), SEMrush (SEMR), Cricut (CRCT), Interlink Electronics (LINK).

 

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1 Financial Times. TSMC: how a Taiwanese chipmaker became a linchpin of the global economy. 3/23/21.
2 CNBC.com. ‘Intel is back:’ New CEO’s plan to make chips for other companies excites investors. 3/23/21.

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