Analysis: AMAT AAPL

Bob and Chris explain how they're approaching Friday's market action.

Chris breaks down the semiconductor sector and the downgrade of Applied Materials (AMAT) and the trimming of Apple (AAPL) .

Bob looks at the charts of AAPL and AMAT.

KATHERINE ROSS: Good morning, Action Alerts PLUS members. It is Friday, July 1st. With the S&P posting the worst first half since 1970, Chris, what do members need to be watching?

CHRIS VERSACE: We need to be interpreting the economic data that we're going to get today for two reasons. The first is it's going to really start to cement the picture on the June quarter, and keep in mind, that comes on the heels of the Atlanta Fed's GDPNow model now calling for a -1% GDP print for the second quarter. That would technically mean if it turns out to be true, that's the technical sign of a recession.

As we shared with members yesterday we're increasingly concerned about the prospect of that and what it might mean in terms of it being a self-fulfilling prophecy, i.e. consumers getting worried, businesses getting worried, both cutting back spending, leading to a more pronounced slowdown in the economy. So we're going to be paying close attention to that data, particularly the new orders data, not only in the final reading of the S&P Global July Manufacturing Report that's out but also what ISM manufacturing has to say as well for June. Really wanting to compare, contrast those two reports to get a clear picture.

KATHERINE ROSS: And Bob, with this open in the green, how does it set us up ahead of this long weekend?

BOB LANG: Well, as we've said before, volatility often declines into a holiday weekend, and we're seeing that happen a little bit today. The VIX is down a little and-- which inspires the bulls to step up and start buying. So we do have a nice open here today. We have obviously, quite a bit of time left to go before we see the final print here but it certainly looks good here.

The problem here is that the markets have given up quite a bit of ground this past week. And that's disturbing after such a strong week, the prior one in which the four-day, week, which the S&P 500 was up almost 7%. So we've given up quite a bit of ground here. It's going to take a huge move up today just to erase a lot of that negativity from earlier in the week.

But I'll tell you, as we come into the holiday weekend, the bulls are stumbling right now, they don't have the ball. The bears have the ball and they're running with it. And even though we are up a little bit today with volatility down, there's been a huge amount of distribution in the market, which is big institutional selling going on.

Oscillators are back down into the negative here, they're not oversold yet, but certainly moving from an overbought reading just about seven days ago, to being mildly negative here is not a positive either. So I'm watching all these indicators over here and certainly, the price action is not inspiring right now but we'll see what happens.

KATHERINE ROSS: Chris, following earnings from Micron, and AMD hitting a 52-week low today, what

kind of approach are you taking to the semiconductor sector?

CHRIS VERSACE: Well, we need to really understand what Micron had said. When we parse its quarterly results for June, they were OK but it was really the guidance that really kind of spooked a lot of people, ourselves included. And it's really for a couple of reasons. First and foremost, it was not only weaker than expected but when you look at it on a year-over-year basis, it's actually down. So they're calling for revenue contraction in the current quarter.

And when we look at the variety of chips, we can read certain things into this. The company did come out and say, hey, data center remains very strong, that's obviously going to be somewhat positive for AMD, somewhat positive for Nvidia and others that serve that space. But it's the smartphone space that I think is really sending the flags because when we parse Micron's comments, that appears to be where the real weakness is. There's also some chatter out there that Taiwan Semiconductor might have to cut its forecast because clients are pulling in orders. And again when we look at that business, it's predominantly smartphone-driven.

So from our position in the portfolio with AMD and Nvidia, we're not as concerned, given the bullish comments out of Micron. If we had smartphone chips in the portfolio, we would be far more concerned about that because it indicates weaker than expected seasonal ramp. That likely means guidance will be cut at these companies and expectations revisited.

KATHERINE ROSS: Bob, looking at the technical landscape overall, how does the sector look?

BOB LANG: Sector is very weak in semiconductors. And the SMH is one that I pay close attention to, and it's making a series of lower highs, lower lows. And panning back out to the weekly chart, a lot of these stocks that are in bearish trends right now, they're below their 50-day moving average. If you pan out to the weekly chart, they're making a run if they haven't already gotten there, to the 200-week moving average. So looking at the SMH, was the semiconductor holders index, that 200-week moving average comes in at about 176 or so. We're at 188 right now. So there's another good 7% down for this index.

And a lot of the big names that we follow are in this index, like Qualcomm, Broadcom, Skyworks, and the like, Micron. So a lot of these names have gotten hit hard earlier this year but there's still some more room to go down. So I think this group is vulnerable here and this also means that other groups in technology groups share that same vulnerability.

KATHERINE ROSS: Chris, you trimmed Apple this morning. It's hovering right above the 52-week low, why trim here?

CHRIS VERSACE: Well, it's the unfolding landscape that we've been talking about with you and with members really over the last couple of weeks. And the news out of Micron is not only relatively fresh but it's an order of magnitude that's greater than what people were looking for. People expected some weakness in the smartphone market. But again, this is a far greater impact than what any indication had pointed to.

And when we look at Apple, even though it's making great progress in non-iPhone areas, services, in particular, the largest revenue generator and profit generator for the business remains iPhone. And when we take the back-to-back comments from Micron and the speculation on Taiwan Semiconductor, which by the way, is a very key manufacturing partner for Apple, it tells us that there's greater risk to the downside, particularly for the smartphone business.

So for that reason, we're going from an outsized position to a relatively moderate-sized position in Apple. The shares have come under pressure, the move here isn't to say that Apple is a bad company or we're throwing in the towel with Apple. No, we continue to like Apple long-term, it's just that in the very near term, the next, three months, the next six months or so it's going to be challenging.

And I think that as more signs emerge that we're going into a recession, more signs that dollar headwinds are continuing to move, it's going to become increasingly harder for Apple's top line. And really that's the greater concern here for us. So rather than sit and perhaps see the shares creep lower, we'd rather take a little more definitive action here.

KATHERINE ROSS: So Bob, when you're looking at the chart, is there not an upside that would have prompted you to wait perhaps?

BOB LANG: Sure. Now, if we pan out to the weekly chart on Apple, and the reason why I do that is the daily chart is a little bit noisier than the weekly, it gives us a little bit better perspective longer-term on Apple. So the weekly chart tells me the 50-week moving average comes in at around 155 roughly, or 160. And that would be an area where I'd be considering holding the stock or even adding more shares because it shows that there's some momentum there and there are some institutional buyers that are stepping in and buying the stock.

But right now, we see the stock is about 137, 138 at this point. And it just continues to make lower highs, lower lows in the chart. It's below key moving averages here. And again we talked recently about the 200-week moving average. Now, where does that come in? That comes in at 99 bucks so from-- just do the math from 138, that's about a 40% drop from here if Apple decides to make a run towards that 200-week moving average. And that would really be painful for us and for subscribers to hold through that sort of drop.

Is it going to happen? I don't know. But certainly, we're in a bear market. So everything is on the table, every opportunity, every chance for a stock to go down is right there in front of it. So Apple not excluded. Again remember something, in a bear market, nothing goes untouched, absolutely nothing. Every stock will get hit in a bear market. There is no hiding under a rock here for any particular stock, even Apple.

So again as painful as it could be, I think the prudent thing to do is just to take a little bit of money off the table and wait it out and see what happens. And if we get a little bit of a rally up, say up to that 155, 160 area, and we fail, then we can take a little bit more off the table there and size the position a little bit smaller than it is right now. But for now, I think this is the prudent thing to do, the right thing to do. Earnings coming out in about 3 and 1/2 weeks too.

KATHERINE ROSS: So you said with that 150 level that you'd consider adding. If like Chris said that you guys are moving from an outsized position to more within the parameters that you set for the portfolio, why would you consider adding following this trim?

BOB LANG: Right. Because I want to follow the smart money. I mean, the smart money generally is all-in on Apple and frankly, has been for a while, and it's been the right move. But I mean, buying it on the dips has been the wrong approach here for the past three months. It's been dipping every single week. So trying to wait for that opportunity to buy lower has been painful for most people. And it just continues the vicious cycle of lower highs and lower lows.

So I guess the downside here for the stock, and again I mentioned 99 to 100 bucks, there's some more levels as well too about 114 and 105, again these are lower levels than-- far lower levels than where we're at right now. The upside may be a few bucks higher, again to 150, 155 bucks, and then we would see the momentum turning upwards. And I would be confident, I'd feel comfortable that there's more upside left on the stock. But for now, I think the downside is vulnerable.

KATHERINE ROSS: Chris, alongside with the Apple announcement that you guys made, you're also downgrading AMAT. Why downgrade this stock when we've seen, for example, Nvidia and AMD carve out 52-week lows this week?

CHRIS VERSACE: So it all ties to what we're seeing really again at Micron and at potentially Taiwan Semiconductor. To the extent that they're seeing cancellations, weaker demand, what it translates into is excess capacity compared to where we thought we were three months ago, six months ago. And typically when we see excess capacity build, you'll see companies start to either push out, perhaps cancel some of their orders for new equipment because again they don't need it as quickly as they thought they did, there's that excess capacity factor there.

So we've got kind of a little bit of a challenging period ahead with Applied Materials. What we're going to want to pay attention to during this earnings season is going to be what Taiwan Semiconductor says about its capital spending for the second half of the year. What does Intel say about its capital spending for the second half of the year? Same for GlobalFoundries and a number of other companies.

As we reassess that, we'll take the time to reassess what our thought is on Applied Materials, more likely looking for a position to get a little more bullish in the name. And I say that because near-term, yes, there might be some excess capacity in chip land but we know that as a number of other technologies continue to mature, we're only going to see longer-term demand for chips rebound and rise, necessitating further capital equipment. So this is more of a preventative move here and let's just pause, as Bob likes to say, let's be prudent in the near term so that we're not telling members oh, you should be buying Applied here and now at the risk of seeing some CapEx spending cuts.

KATHERINE ROSS: OK, Bob. And with that more bullish tone that Chris took towards the end there, what kind of levels are you going to look to see AMAT take an upside?

BOB LANG: So I'm going to take a more bearish view of this, at least from the chart perspective. And again, we looked at the 200-week moving average on Apple, let's take a look at the 200-week moving average in Applied Materials here, and that comes in at about the $80 level. So it's about 9% lower than where the current price is here. The last four weeks have been pretty negative for Applied Materials, four out of the last five weeks the stock has been down.

Last week, of course, was up strong but we didn't-- it was an inside week, and then today is probably going to be solidifying what's called an outside week, which means it has higher highs and lower lows than the prior week. So that's not bullish at all. So for now, I mean I'd say we just sit on Applied Materials. And as Chris said, we've downgraded it and looking for an opportunity to add some shares I think maybe even lower at that 200-week moving average is going to be a good opportunity to add some shares. We'll wait to see if it tests that down there in the next couple of weeks.

KATHERINE ROSS: Well, and it just fell to a 52-week low right as we were talking. All right, we're going to end there. Members, thank you for joining us this week. And please continue to send your questions into We'll see you on Tuesday.