Intel Punctuates the Rollback of the Market's V-Move

By Dr. Duru written for One-Twenty

November 12, 2008

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In late October, I looked for something different from Intel and laid out some fundamental justifications for dipping my toe into the water for a 3 to 5-year play. INTC soon obliged by breaking its steep 2-month downtrend, but this move coincided with a "V-move" in the major indices that ended in a buying panic the day before the election. At that time, I warned that we had rallied into a critical juncture that had a high likelihood of leading into a sell-off. After we got confirmation of a buying panic, I pointed out that the likely resolution of this V-move would be a rollback of most, if not all, of the preceding gains. Today, the S&P 500 closed at $852, sitting neatly on top of the 52-week, and multi-year closing lows. The V-move has been completely rolled back. Tonight, INTC provided the punctuation to this action by issuing a severe warning on revenue and margin expectations:

"Intel Corporation today announced that fourth-quarter business will be below the company's previous outlook. The company now expects fourth-quarter revenue to be $9 billion, plus or minus $300 million, lower than the previous expectation of between $10.1 billion and $10.9 billion. Revenue is being affected by significantly weaker than expected demand in all geographies and market segments. In addition, the PC supply chain is aggressively reducing component inventories. The company's expectation for fourth-quarter gross margin is now 55 percent plus or minus a couple of points, lower than the previous expectation of 59 percent plus or minus a couple of points, primarily due to lower revenue and other charges associated with the weaker-than-expected demand environment."

This punctuation confirms that our economic malaise continues and is likely to get worse from here. It is yet one more piece of bad news for the market to digest on top of other recent financial horrors like Circuit City's bankruptcy, reductions in Best Buy's (BBY) revenue guidance, and looming bankruptcy for General Motors (GM). I still hold my small position in INTC as one way to play an eventual recovery - it did not meet my upside target for considering releasing it early during the last rally. However, I do not intend to add to the position into the selling that will come from tonight's warning. There is absolutely no rush here. We still have not observed or read any credible basis from which to speculate on just how bad things will or could get in the economy before a recovery begins. I still expect that the way our malaise gets resolved will be "unexpected". (Note that the next support on the major indices is coming up from the 2002 and 2003 lows).

Be careful out there!

Full disclosure: Long INTC, short BBY. For other disclaimers click here.

DR. DURU®, 2008