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MARKET > Commentary Wednesday, April 11, 2001
by: S.P. Brown

Chip Flip

So who do you believe, Lehman Brothers' Dan Niles or Salomon Smith Barney's Jonathan Joseph? One sees the glass as half empty while the other sees the glass as half full. Of course, the "glass" I'm referring to is the semiconductor sector.

According to the pessimistic Niles, the chip-making landscape is as barren as the surface of the moon. On Monday the distinguished analyst reduced his revenue and earnings forecasts for three major chipmakers: Intel (Nasdaq:INTC), Texas Instruments (NYSE:TX) and Cypress Semiconductor (NYSE:CY). To support this severe action, Niles wrote, "The worst year for semiconductor revenues in the history of the industry so far was 1985: down 17 percent. We predict 2001 will be worse."

The PHLX Semiconductor Index (SOX) tumbled 12.31 points to 475.22 on Niles' downgrade and market prognostication, which put the oft-quoted index at levels not seen since October 1999.

Now fast forward to Wednesday. Salomon's equally distinguished chip analyst Jonathan Joseph stepped to the fore with a more cheerful opinion of the chipmakers. Joseph upped the semiconductor sector to an "outperform" from "neutral," indicating that things can "only get better from here." In fact, he believes that the SOX has downside risk of 400, but upside potential of 700. In other words, the semis are no longer a loser's bet.

Not surprisingly, many traders took to chips today the way lemmings take to the sea and bid up the SOX 44.17 points to 564.29, an 8.5 percent rise on the day.

As for Niles' whipping boys, they reclaimed all of their losses from Monday's sell-off, and then some. Intel gained $2.75 to $27.52, Texas Instruments soared $4.40 to $34.00 and Cypress Semiconductors surged $1.32 to $1.66.

So who made the correct call? I think Joseph did. I'm disappointed (but not surprised) that Niles would downgrade chip stocks already trading at 60 percent discounts to their 52-week highs. This smacks of the same idiotic reasoning that supported analysts' upgrades of the likes of Webvan (Nasdaq:WBVN) and Priceline (Nasdaq:PCLN) after these issues already tripled (even quadrupled) their IPO price. I guess some folks just can't ignore the institutional imperative to extrapolate.

Today's surge in the semis did wonders for the Nasdaq Composite Index (COMPX). The semi-packed index advanced 46.92 points, or 2.53 percent, to close at 1,898.95, giving the COMPX its third- straight gain. What's more, this once moribund index (remember all those analyst calls for 1,500) has gained more than 250 points over the past week of trading. Breadth was again positive on the Nasdaq with winners beating losers by 22 to 17 on 2.37 billion shares, an 8 percent increase over Tuesday's level. In other words, there appears to be some conviction behind today's buying.

The COMPX also received a lift from a few of its Lazarus-like big-cap networking issues. Cisco Systems (Nasdaq:CISCO), Sun Microsystems (Nasdaq:SUNW) and JDS Uniphase (Nasdaq:JDSU) all posted strong gains today, as they have for the entire week.

Unfortunately, the semis did little to bolster the Old Economy. The Dow Jones Industrial Average (INDU) slipped 89.27 points, or 0.88 percent, to close at 10,013.47 after briefly piercing the psychologically significant 10,000-point level in late-afternoon trading. Weakness in retailers, cyclicals, oils and drugs kept the blue chip average in check for most of the day. Leading the downdraft were Home Depot (NYSE:HM), General Motors (NYSE:GM), Exxon Mobil (XOM), Merck & Co. (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ).

Since I'm a half-full (as in the glass) kinda guy, at least we can take some solace that the INDU was able to hold 10,000.

As for earnings news, Yahoo! (Nasdaq:YHOO) shares dipped $0.16 to $15.86 after the Internet portal king reported earnings of $11.5 million, or $0.02 a share, in the first quarter compared to the First Call lowered estimate for a profitless quarter. Yahoo also reported that it will fire (I think I prefer Cisco's euphemism of "involuntary attrition") about 420 of its 3,510 employees.

Another tech company beating lowered estimates was Redback Networks (Nasdaq:RBAK), which reported a first-quarter loss of $0.13 a share compared to the First Call estimate for a loss of $0.15. Unfortunately, Redback's record-beating performance did little for its share price. The company's shares closed down $0.10 to $15.84 during the regular trading session.

The earnings news wasn't entirely bleak, though. After the close, Research In Motion (Nasdaq:RIMM) reported it had earned $8.3 million, or S0.10 a share, for the quarter that ended February 28. That's a huge increase from its earnings of $3.2 million, or 4 cents per share, for the same period last year. What's more, First Call had expected earning of $0.07 a share. In regular trading, RIMM shed $2.82, or 11 percent, to close at $21.93. However, in after-hours trading, RIMM soared nearly 30 percent to $28.45.

I've been preaching in these commentaries for the past month that it wouldn't take much good news to get these tech stocks moving higher again. To that end, RIMM is a perfect example. Traders are willing to buy earnings beaters if given the chance.

However, before anyone mortgages the home or hocks the kids for cash to sink into the tech sector, just keep in mind that technology companies are expected to report a 37 percent decrease in first-quarter profits, a 36 percent decline in the second quarter, a 25 percent drop in the third quarter and 1 percent decline in the fourth quarter, according to First Call. In other words, tread carefully because there are still plenty of earnings disappointments in the waiting.

Nevertheless, I think the worst is over. In fact, I think that 1,500 is out of the picture at this point -- there's just not enough bad news left to punish the COMPX much more. However, that doesn't mean that the index might not test 1,600 again, because it could. The COMPX is getting close to challenging resistance of 1,975. I think if it spends too many days banging its head against this level without closing above it traders could become frustrated and start selling again.

As for the Old Economy issues, I think they are in more danger of being sold off than the New Economy issues are, particularly if the INDU can't hold 10,000. In fact, the INDU could run into heavy resistance at 10,300. Like the COMPX, if the INDU spends too much time trying to close above resistance, traders will likely be inclined to sell.

In the meantime, keep an eye on the Splittrader Current Play list. If I may indulge in a little hubris, we've done a good job of staying on top of this market for the past six months, and we intend to keep doing so for the next six months.

S.P. Brown

Editor's Note:

If you have not seen the Weather Channel today, you may not be aware that Denver was hit with a nasty snowstorm. The heavy spring snow knocked out power across much of the Denver metropolitan area. Unfortunately, the Splittrader home office was hit by the power outage, so we have been unable to update the site all day. We apologize for any inconvenience our down time may have caused you.


Copyright 2001

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