Chip Warnings Weigh

Updated from 12:46 p.m. EDT

Advanced Micro Devices(AMD Quote) was down over 20% after disappointing investors with weak preliminary fourth-quarter revenue figures, as accumulating negative news began to drag down an already-weary sector.

AMD's announcement followed a warning after the bell Monday from STMicroelectronics(STM Quote), Europe's second-largest chipmaker.

Both of these announcements precede financial results from Intel(INTC Quote), the world's largest chipmaker and AMD's prime competitor in the market for computer microprocessors and flash memory. Intel will post its results after Tuesday's closing bell. Amid the dark clouds of AMD and STMicro, Intel shares were recently down 36 cents, or 1.6%, to $22.52.

AMD was recently down $4.66, or 23.1%, to $15.47; STMicro was off 79 cents, or 4.3%, to $17.77; and the Philadelphia Semiconductor Index was down 2.3% to 397.05, suffering its first drop below 400 since late October.

"I think people are really bracing themselves for the first quarter," said Scott Curtis, managing director of trading for Kinetics, a New York-based money management firm, noting that there hasn't been much negative news during the past couple of weeks. "Semis topped at the beginning of December, so giving back 5% to 10% isn't going to be the end of the world." Ten percent is exactly what the chip index has given back since it completed a three-month run higher in early December.

As for AMD, Curtis said the company has been outperforming the overall sector for the last half of the year. "This is a stock that people fell in love with for quite a while," he said.

Indeed, the stock hit a three-year high back in December at $24.85. But with Tuesday's move, shares are down 36% since then.

AMD said overall sales will increase "slightly" from the $1.24 billion reported in its third quarter. Analysts had expected sales of $1.31 billion, an increase of 5.8%. Operating income will be positive, but "down significantly" from the third quarter.