Technology shares have
remained a thorn in investors' sides since the unwinding of the 1995-2000
tech boom and the group, broadly speaking, has left many investors still far
under water. Most would rather not hear and even think about
purchasing any stock in these sectors. But as a trend and sector watchers,
some very interesting devolvement are rumbling in tech land.
I began noticing this around
the time of my early June publishing, just as many investors were likely
getting their May statements telling them how ugly things had been for their
accounts. As I reviewed where the strength was in the 2nd quarter,
the Biotech and Real Estate sectors were the top two performers. But looking
further to see what groups were improving the most and might emerge as
leaders, I saw strong relative strength in many of the still-hated groups
like Software, Telecom, Internet and yes, Semiconductors. This may be at odds
with the theory that growth sectors do lousy in the summer, but the signs
from our database are unmistakable.
Semiconductors
I usually look to this group
for clues on where the market is headed in managing our client portfolios.
What are the tea leaves telling us now about the chip stocks?
I wrote in my June 2nd essay
"Commodity Investments - Stress at the Trend lines" to watch the
SOX, the "manufacturing commodity." The chips were gaining
sponsorship as evident in the improving relative strength readings, which
told us the uptrend that started late 2003 was still intact. Recent action
shows even more improvement.
The Semiconductor Bullish
Percent had fallen to a low of 22% (22% of semiconductor stocks on Point
and Figure buy signals) in April and then reversed up to X's in May as 6% of
the stocks in the sector moved from a Point & Figure sell signal to a buy
signal and gave us the first signs of life for the group. Over the past six
weeks or so, the group has continued to improve on an absolute as well as a
relative basis.
Before going further, let's
review the concept of the Semiconductor Bullish Percent. Using the same
concept as the broad NYSE Bullish Percent, this indicator plots the percent
of stocks on buy signals in each sector and is plotted on a grid from 0% to
100%. As with the NYSE Bullish Percent, the best buy signals historically
come when a sector goes below 30% and then reverses up, signaling first that
supply has become exhausted, then that demand has taken control. Conversely,
the best sell signals come when a sector goes above 70% and then reverses
below that level. How has this played out for the chip stocks over the last
few years?
In retrospect, October 2002
and March 2003 can be widely seen as significant market bottoms. These lows
coincided with the final post-9/11 sell-off and the pre-Iraq War nervousness.
In both cases the market rallied after those positive reversals. Both of
these were fabulous buy signals from below the 30% level on the Semiconductor
Bullish Percent. It would stand to reason that these should be important
markers on the SOX chart as well as the Semiconductor Bullish Percentage and
most individual chip stock charts.
The Philadelphia
Semiconductor Index
The SOX index is aligned very
closely with these lows, making a low on October 10, 2002 and then a late
February of '03 reversal from a higher low just before the war nervousness
lifted and the market headed higher.
The trend turned positive in
October 2003 and rallied up to 560 by January of 2004. After the brutal
summer sell off, it made higher bottoms at 360 and 380 then gave its second
consective buy signal recently at 460. We believe the SOX index still has a
way to go as the price objective points toward its all time highs, but there
is one caveat: summertime blues are not usually kind to the chips, so don't
be surprised by some backing and filling in this key growth sector in the
short-term.
The Semiconductor Bullish
Percent
Interestingly, the semiconductor
Bullish Percent accurately called the important bottoms not just for the
sector, but for the overall market, as well. While this chart tends to have
wild swings and round trips, reversals from below the 30% tend to be low risk
entry points, not to mention leading signals for the market itself. The
recent bottom of 22% and subsequent breakouts bode well for a possible run
toward the 80% range, where tops have been seen over the last few years. In
short, this indicator suggests there's room for many more semiconductor
stocks to join the party and rally before seeing this group make a top.
Now lets take a look at how a
couple of chip stocks, Intel (INTC) and KLA-Tencor (KLAC), have performed
since the time of the late-2002/early-2003 market lows.
Intel
Corp. (symbol: INTC):
Intel represents 5.25% of the
SOX index. The important markets turns are very similar on each chart. The
October '02 low is quite obvious and in the post 9/11 environment seemed like
a reckless buy signal to act on. Could the August '04 bottom look the same
two years from now?
KLA-Tencor
(symbol: KLAC):
KLA Tencor represents 9.81% of
the SOX weighting. One of the reasons we pay more attention to the
Semiconductor Bullish Percentage (unique to Point & Figure analysis) than
the SOX index itself is because it is equal weight, one semiconductor point
and figure buy signal, one notch in the positive column. This "one
stock, one vote" methodology tends to filter out the distortion a heavy
like KLA can create. Be that as it may, KLA chart is right where you would
expect, showing market turns in lock step with its peers, the SOX and the
bullish percentage.
Something really interesting
appears to be developing that's worth keeping your eye on. Semiconductors
have a track record in illuminating important market shifts and trends. As
well, they tend to be a useful proxy for all the technology-related sectors.
The relative strength of the semi's tells us these have come back in fashion.
Take this as a sign that growth in the economy will continue into next year
with sufficient vigor to support higher prices in these areas. We see investment
opportunities in the still-unloved technology areas amid overly-skeptical
markets observers. However, a late summer pause from the April lows is a very
good possibility. Investors should look to use any such pullbacks as buying
opportunities.
