Chipmakers ante up
05/22/18

The US stock market woke up yesterday with a smile on its face, perhaps because US Treasury Secretary Steve Mnuchin said over the weekend that the Trump administration was “putting the trade war on hold” and backing off from implementing tariffs on China.

The ongoing twists and turns of other geopolitical sagas in recent months (North Korea, Iran) suggest this latest bit of “good news” is unlikely to be the last word on the US-China trade story, but for the moment, it does represent the status quo. The question is what it may mean for the markets.

Semiconductor stocks appeared to appreciate the news more than many areas of the market, with the Philadelphia Semiconductor Index (SOX) outgaining both the S&P 500 (SPX) and the Nasdaq 100 (NDX) on the day. And one of the chip stocks that jumped the most was Micron Technology (MU), which shot up 5.8% intraday but cooled off to close near the middle of its range, but still up more than 3%.

The following chart shows MU has enjoyed a nice run since bottoming below $10 in mid-2016, having rallied more than 500% by the time it peaked in March:

Micron Technology (MU), 2/27/15 – 5/21/18. Micron daily price chart.

Source: OptionsHouse

A lot of chipmakers do a lot of business with Chinese companies, and Micron is reportedly one of the 10 chipmakers with the most exposure to the Chinese market (51% of sales).1 So, friendly trade relations between the US and China could improve these companies’ prospects—that’s the sector story.

But what may have really put MU over the top yesterday was the individual stock story, in this case, news that the company was upping its Q3 guidance: earnings from $2.76-$2.90/share to $3.12-$3.16/share, and revenue from $7.2 billion-$7.6 billion to $7.7 billion-$7.8 billion.2

Micron, which suffered a milder downturn than many stocks in February (possibly because it had already pulled back around 20% from its November 2017 high), shot to the upside in early March, topping out at $63.43 before selling off again, this time to around $44.30 in late April and early May.

That slide likely frustrated many Micron bulls, who watched the stock decline around 25% after the company released estimate-beating earnings numbers on March 22. Beginning on May 3, though, the stock sprinted higher, breaking out above its mid-April swing high on May 16 to reach $56.91—a 24% gain in 10 days—before pulling back below that breakout level on Thursday and Friday:

Micron Technology (MU), 3/8/18 – 5/21/18. Micron (MU) daily price chart.

Source: OptionsHouse

Can MU sustain the move? The TipRanks average 12-month analyst price target from (available on E*TRADE.com) is $74.23, with a very wide range of $35-$101 (see chart below). But the price action over the past few days may have established some important price levels that short-term traders will be watching.
Micron Technology (MU) analyst targets, 5/21/18.

Source: TipRanks

Many traders look for a stock that breaks out above or below resistance or support on high momentum to potentially return to that level before resuming its move. Since MU already pulled back below the breakout level around $54.25, some bulls would likely interpret a close below Friday’s low of $52.85 as a sign of weakness (something potential short-sellers would probably be looking for to initiate their trades).

On the other side of the coin, clearing the near May 16 high (last Wednesday) would leave no other hurdles—in terms of technical barriers—between here and the stock’s March peak. Bulls may see that level as a possible target, especially in the absence of a negative twist in the trade saga, and with the support of bullishness in the wider market.

Market Mover Update: June WTI crude oil futures (CLM8) pushed back above $72/barrel yesterday with a 1%-plus rally, while the Russell 2000 (RUT) hit its fourth consecutive record high. Gaming tech company Scientific Games (SGMS) hit a new all-time high above $62.

 

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1 CNBC.com. These tech stocks — including Skyworks, Qualcomm — have the most to gain from a US-China trade truce. 5/21/18.

2 MarketWatch.com. Micron Tech's stock advances on raised third-quarter outlook. 5/21/18.

3 TipRanks. Micron Technology Price Targets. 5/21/18.