Tech Is Cheap and May Get Cheaper

In this uncertain environment, the Nasdaq could be entering a bear market that could take us into mid-2006 before it hits bottom. The trends for a quarter are generally set in the first two weeks, and it seems now that all asset classes are on the defensive. Recent weakness in energy shares and utilities indicates that there are no safe havens.

According to my model, technology remains the cheapest sector at 14.9% undervalued, with consumer durables in second place at 9.1% undervalued. Energy and public utilities dropped below 5% overvalued Wednesday for the first time this year.

Looking at the daily charts, there's a simple reason for concern: the location of the 200-day simple moving averages for the Nasdaq and Philadelphia Semiconductor Index, or SOX. To avoid further downside risk, both the Nasdaq and the SOX need to stay above their 200-day SMAs at 2073 and 433.64, respectively. The Nasdaq failed to accomplish this feat Tuesday, while the SOX, which held this key SMA on Oct. 12, was below it for most of Wednesday. I guess we can blame it on Intel (INTC).

My model shows Intel to be 22.2% undervalued, with a fair value being $30.50. The chipmaker had a volatile ride Tuesday around its earnings report. It closed at $23.72 on Tuesday pre-earnings, traded above $24 on an initial positive reaction to earnings, then moved below $23 on confusion related to its performance vs. consensus.

Intel opened around my weekly value level at $22.81 and is trying to pull its way back up to my quarterly pivot at $23.34. The company reported strong demand for notebook PCs, which boosted third-quarter profits by 5% on earnings of $2.0 billion, or 32 cents per share. Intel says that it's having trouble meeting demand for products, and this is adversely affecting its outlook for revenue. Earnings confusion involved how the 32-cent EPS actually compared to the consensus of 33 cents, and related charges of 4 cents and 2 cents. My 2 cents is, why quibble -- shares are undervalued, the weekly chart profile is oversold. Use weakness to buy Intel.