The Nasdaq pullback this week hoists a couple of red flags
that could stymie the market sooner than I expected. And
the negative market reaction to quarterly earnings
by Cisco Systems (CSCO:Nasdaq) and Dell (DELL:Nasdaq)
clouds what I still believe is a positive outlook for
technology for the remainder of 2005 and beyond.
The Nasdaq decline from the Aug. 4 high of 2219 to today's
low of 2145 is a modest 3.3% cooling off on the overheated
index, and a pullback of similar magnitude occurred in
June. However, two warning signs this week -- the higher
year U.S. Treasury yields and higher crude oil prices --
signal that it will be much more difficult for the stock
market, including the tech-heavy Nasdaq, to move higher.
In June, the Nasdaq traded as low as 2040 with the 30-year
yield at 4.18% and crude oil at $55.90 per barrel.
when the Nasdaq began its decline a week ago, crude oil
prices were bubbling above $62.00 per barrel and the 30-
year yield had climbed to 4.62%. Today, crude oil traded
close to $67.00 per barrel, which will negatively affect
A closer look at the 30-year U.S. Treasury reveals further
proof of why stocks will struggle. The daily chart for the
30-year U.S. Treasury yield shows that it's been below its
200-day simple moving average (SMA) since Aug. 6, 2004.
Since then there have been three tests of this key moving
average in which a rising-yield trend reversed -- on Dec.
4, 2004; March 23, 2005; and Aug. 9, 2005. The 200-day SMA
ended the week at 4.619. A trend in which the 30-year
rises about 4.62 will make it cheaper than (or yield
its 200-day SMA, and that is a negative for stocks. A
rising 30-year yield pulls down my calculation for the
value of every single stock, which could lead to further
downside for the Nasdaq.
So how much will stocks suffer? The best way to measure
just how severe a Nasdaq correction could be is to
its weekly chart profile and the location of key levels
from my models. Today's close at 2157 below my monthly
pivot at 2162 signals that a correction over the next
to five weeks could reach my monthly value level at 2060,
for a 7.2% pullback. If this correction does not occur,
then the rally should resume with my quarterly risky level
as the target at 2381. (A value level is a price at which
my models project that buyers will emerge, while a risky
level is a price at which investors are likely to reduce
holdings, according to my model.)
On the earnings front, results for key tech stocks have
been strong enough this week to offset the two red flags.
Cisco reported record earnings, but Wall Street was upset
by a potential weaker-than-expected current quarter, even
though the company reaffirmed its long-term guidance and
forecast an annual revenue growth rate between 10% and
After reporting after the close yesterday, Dell traded as
low as $36.10 today, down 8.8% from Thursday's close of
$39.58, as its guidance for the current quarter was below
Wall Street estimates.
The major economic event for the week was the Fed's
decision to raise the federal funds rate to 3.5%, its 10th
25-basis-point hike since June 2004. This increase was
expected, but now many economists are projecting that the
Federal Open Market Committee will continue to raise rates
right through Fed Chairman Alan Greenspan's retirement in
January. My call is for the FOMC to stop raising the funds
rate at its Nov. 1 meeting, in order to provide a neutral
stance to smooth a transition to a new chairman at its
31-Feb. 1, 2006, meeting. Next week's economic data
readings for both consumer and producer price inflation,
housing starts and industrial production. Odds favor that
inflation readings will be well-contained, that the
market will begin to soften, and that industrial
should continue its rebound.
The technology-specific economic surveys continue to be
strong. On Tuesday, JupiterResearch indicated that online
ad sales would more than double over the next five years.
This projection indicates to me that marketers are gaining
confidence in the Internet, particularly in paid-search
advertising, and the number of companies advertising
is on the rise. Spending on ads that include new
technologies, such as enhanced graphics and sound, is also
My fundamental models show the technology sector 13.9%
undervalued, and health care 2.9% undervalued. All other
sectors are overvalued: basic industries, by 6.5%; capital
goods, 4.3%; consumer durables, 5.6%; consumer
6.3%; consumer service, 1.1%; energy, 16.0%; finance,
public utilities, 7.4%, and transportation, 1.3%. These
readings continue to suggest that a rotation into tech
stocks is a compelling longer-term investment strategy.
Within technology, computer manufacturers ended the week
27.2% undervalued vs. 25.1% last week; semiconductors
the week 20.2% undervalued vs. 17.2% last week; and
software remained 15.6% undervalued.
The benchmark Technology SPDR (XLK:Amex) ended the week
down 1.75%, while the S&P 500 was up 0.32%. Since its
inception April 4, the model portfolio is up 6.17%
(including cash) vs. a gain of 7.44% for the XLK and 4.91%
for the S&P 500.
The model portfolio's gain since its inception on the
dollars invested is 7.35%. Of 21 open positions, five are
outperforming the XLK and three are showing double-digit
I continue to hold 19 long positions in the model
portfolio, and because of the possibility of a deeper
Nasdaq correction, I established two short positions this
week. Both were in exchange-traded funds: the
HOLDRs (SMH:Amex), as the Philadelphia Semiconductor index
(SOX) has led the market with the strongest industry gain
since the end of April, and the Nasdaq 100 Unit Trust
(QQQQ:Nasdaq). These additions bring the number of
positions in the model portfolio to 21, near the maximum
25. Once the total reaches this limit, I will close an
older holding whenever I find a better long or short
Now let's recap all of the portfolio holdings. A quick
reminder on the rating system: Ones are stocks that are
buys right now. Twos are stocks that are buys on a
in price. Threes are stocks that are sells on strength in
price. Fours are stocks that should be sold right now.
Cisco (CSCO:Nasdaq, $17.80, 600 shares, 7.88% of the
portfolio): This position consists of three lots -- 225
shares added at $17.66 on April 4, 175 shares at $19.25 on
June 14, and 200 shares at $19.19 on June 27 -- for an
average cost basis of $18.63. Cisco is 36.7% undervalued,
and I am reducing my price target to my quarterly risky
level at $21.30, which I expect shares to reach over the
next six months.
On Monday, Reuters reported that Cisco was considering
buying Nokia (NOK:NYSE ADR) to obtain its wireless
infrastructure technology. But Cisco CEO John Chambers
indicated on the company's earnings conference call
evening that an acquisition of such magnitude was not in
his business plans.
Cisco reported that its fourth-quarter profit rose 12%
over year, on steady demand for routers and other Internet
equipment. Despite solid results, shares declined in after-
hours trading because the revenue forecast for the current
quarter was slightly below Wall Street estimates. If my
premise -- that demand for broadband around the world is
the rise -- is true, then a modest one-quarter revenue
should provide an opportunity to add additional shares to
the model portfolio on weakness to a lower value level.
Gateway (GTW:NYSE, $3.81, 1,200 shares, 3.37%): I added
1,200 shares of Gateway on July 6 at $3.42 a share, and
stock is 68.0% undervalued. My price target is my
risky level at $5.59, which I expect to be achieved over
the next six months.
Because of accounting questions that arose from Gateway's
April agreement with Microsoft (MSFT:Nasdaq), Gateway
a notice with the Securities and Exchange Commission on
Wednesday that it is delaying the filing of its second-
quarter earnings report. Gateway got the SEC guidance it
needed on Aug. 2, and should be able to provide quarterly
results on Monday.
Integrated Device Technology (IDTI:Nasdaq, $10.80, 375
shares, 2.99%): I added 375 shares of IDT to the portfolio
at $10.42 on July 11. The shares are 47.2% undervalued,
my price target is the stock's 52-week high at $21.25,
which I expect it to reach over the next six months.
On Monday, the Federal Trade Commission told Integrated
Device Technology and Integrated Circuit Systems
(ICST:Nasdaq) that the waiting period related to their
pending merger had ended. Both companies expect the merger
to close this fall, subject to approval by IDT and ICS
stockholders. This merger makes sense to me as the pair's
product lines should meld together quite well. IDT
hardware, software and memory technologies to enhance
network equipment, while ICS designs silicon-timing
and digital multimedia applications. IDT announced
that it will hold a special stockholder meeting on Sept.
to vote on matters related to the merger.
Juniper Networks (JNPR:Nasdaq, $23.58, 175 shares, 3.04%):
I added 175 shares of Juniper to the portfolio at $23.70
July 25, and my model shows Juniper 54.0% undervalued. My
price target is my quarterly risky level at $33.37, which
expect the shares to reach over the next six months.
Juniper demonstrated my theme that telecom providers and
other organizations would be upgrading their Internet
protocol (IP) environments, with several announcements
week. The company said that Northwestel, a subsidiary of
Bell Canada, is using some of Juniper's routers to upgrade
its network because of their ability to support a wide
range of voice and data services. Juniper also announced
that the city of Burbank, Calif., received a "Best
Deployment Scenario - 2005" award from the Info Security
Products Guide for installing Juniper's firewall and
network security software.
Microsoft (MSFT:Nasdaq, $27.05, 150 shares, 2.99%): On
30, I added 150 shares of Microsoft at $25.06, and the
software maker is 11.5% undervalued. My price target is my
semiannual risky level at $35.20, which I expect shares to
reach over the next six months.
While this week didn't bring any significant news on
Microsoft, the company will be getting a lot of media
attention over the next six months or so as it releases
products and upgrades, including Xbox 360 and Windows
Vista. The publicity surrounding these releases should
provide a nice boost to shares in the coming months.
Newport (NEWP:Nasdaq, $13.12, 600 shares, 5.81%): I added
300 shares of Newport to the portfolio at $14.17 on July
11, and another 300 shares on July 29 at $13.17, for an
average cost basis of $13.67. Newport shares are 59.5%
undervalued, and my price target is my monthly risky level
at $15.41, which I expect the stock to reach over the next
There are no new developments to report on Newport this
week. The stock's slide since mid-July has been a reaction
to its earnings report, and I used this weakness to add to
the position on July 29. As global broadband demand
continues to grow, I expect Newport to benefit.
Open Text (OTEX:Nasdaq, $12.11, 325 shares, 2.90%): I
325 shares of Open Text to the model portfolio on July 26
at $12.24. The stock is 59.6% undervalued, and my price
target is my semiannual risky level at $18.34, which I
expect shares to achieve by the end of 2005.
Open Text is offering new content storage archiving
software for Microsoft users, the company announced
Tuesday. The software helps organizations save large
electronic documents such as those required by court cases
and compliance mandates. Archiving software has become a
growth segment in the technology sector because of
companies' need to manage and store electronic information
on secure networks to meet regulatory requirements.
QLogic (QLGC:Nasdaq, $33.68, 275 shares, 6.83%): The model
portfolio's original position of 150 shares was
on May 11 at $29.39. After trading a second lot of 125
shares for a gain of 11%, I added the shares back on July
21 at $31.10, giving me an average cost basis of $30.17.
QLogic is 23.4% undervalued, and my price target is my
quarterly risky level at $39.35, which the stock should
reach over the next six months.
Although there was no significant news on QLogic this
the stock did perform well with shares rising from $32.64
at last week's close to as high as $33.77 today, despite
the market's decline.
RSA Security (RSAS:Nasdaq, $12.74, 325 shares, 3.05%): I
added 325 shares of RSA to the portfolio at $12.21 on July
11. The company is 47.7% undervalued, and my price target
is the stock's quarterly risky level at $17.44, which I
expect the shares to reach over the next six months.
This is another one with no news to report this week, and
shares ended the week down slightly.
Sun Microsystems (SUNW:Nasdaq, $3.84, 3,000 shares,
This position consists of two lots -- 1,500 shares added
$3.55 on April 21, and another 1,500 shares at $3.75 on
June 2 -- for an average cost basis of $3.65. My price
target is the 52-week high at $5.65, which I expect the
stock to reach in the second half of 2005. Excluding its
pending purchase of StorageTek (STK:NYSE), which is 14.5%
overvalued, Sun ended the week 24.7% undervalued.
As another example of renewed demand for broadband, Sun
announced on Monday that it would be supplying wireless
services provider T-Mobile with software and hardware to
upgrade its service-delivery portal. The new portal will
improve the processing of online Internet transactions
via the T-Mobile customer portal across Europe, and will
also provide subscribers with downloads of content such as
games and music.
Sun also announced that it will be using Palm's Treo
smartphone to send instant messages, and provide a secure,
Web-capable device for accessing corporate applications,
email and calendars. The service is used by Sun's U.S.
field services organization for remote and onsite access
its call-management system to better serve Sun customers.
Sun is thus willing to spend on new IT products if it can
increase productivity, which I believe this move will
Time Warner (TWX:NYSE, $18.24, 450 shares, 6.05%): This
position consists of two lots -- 225 shares purchased at
$17.47 on April 4, and another 225 shares at $17.16 on
April 20 -- for an average cost basis of $17.32. Time
Warner is 29.6% undervalued, and my price target is
the stock's fair value, which I expect it to reach within
the next six months.
The big news for Time Warner this week was that
investor Carl Icahn appears to be organizing an investor
group to advocate the breakup of Time Warner, including
spinoff of America Online, according to media reports.
Icahn believes that the only way to increase shareholder
value is to bust up the company into separate businesses.
However, AOL continues on pace with its makeover. On
Monday, the unit acquired Wildseed, a privately held
wireless technology provider, to expand its wireless
The new AOL.com portal needs to have wireless
and the AOL wireless division will now include AOL Mobile,
Wildseed and Tegic Communications, added in 1999.
Wildseed's technology will be used to upgrade AOL's
VeriSign (VRSN:Nasdaq, $23.39, 150 shares, 2.59%): This
share position was added to the portfolio at $24.06 on
21. The stock is 36.2% undervalued, and my price target is
my quarterly risky level at $31.97, a price I expect the
stock to achieve over the next six months.
VeriSign announced Tuesday that it has completed its stock
repurchase program from 2001 and that a new $500 million
stock buyback program would commence immediately. No time
limit was set for completion of the new program. This did
not help share price this week as the stock declined below
my monthly value level at $23.90 to a low of $22.60 today.
Friday's close should give me a new value level for next
week, and I will send out an alert on Monday if any action
Xilinx (XLNX:Nasdaq, $27.00, 150 shares, 2.99%): This 150-
share position was added to the portfolio at $26.52 on
20, and the stock is 31.6% undervalued. My price target is
my monthly risky level at $30.85, a price I expect the
stock to achieve over the next six months. There are no
developments to report on Xilinx this week, and the
chipmaker's stock dipped alongside the broader market.
Zygo (ZIGO:Nasdaq, $10.99, 400 shares, 3.24%): I added 400
shares of Zygo at $10.60 on July 11. The company is 59.7%
undervalued, and my price target is the stock's March high
of $14.48, which I expect the stock to achieve in the
second half of 2005.
Zygo will release its fiscal 2005 fourth-quarter results
4 p.m. EDT on Thursday, Aug. 25, followed by a conference
call at 6 p.m. The consensus estimate is for earnings of
cents a share. Expectations in this market environment
been difficult to judge, but shares are undervalued enough
to merit staying with this stock through the earnings
report. To review, Zygo supplies optical metrology
instruments and precision optics used in making
semiconductor capital equipment.
EMC (EMC:NYSE, $13.33, 300 shares, 2.95%): EMC, an early
entry in the model portfolio that was traded for about a
15% gain, rejoined the model portfolio at $13.75 on June
29. The shares are now 59.6% undervalued, and my price
target is my monthly risky level at $15.15, a price I
expect EMC to reach over the next six months.
EMC is expanding its line of information technology (IT)
products, and in addition to storage hardware, the company
is offering software to help customers manage their IT
networks, including servers and networking gear. With its
new enhancements, the company is providing more security
features to protect the complete networking environment
from viruses and cyber-terrorism.
Intel (INTC:Nasdaq, $26.31, 475 shares, 9.22%): This
position consists of three lots -- 175 shares added at
$23.10 on April 4, 150 shares at $26.19 on June 27, and
shares at $26.95 on July 20 -- for an average cost basis
$25.29. Intel is 21.4% undervalued, and my price target is
my quarterly risky level at $30.98, which I expect the
stock to reach in the next six months.
On Thursday, Goldman Sachs downgraded Intel to neutral
because the brokerage firm believes that Intel's planned
capital investments in new plants will shrink margins and
reduce revenue. In my opinion Intel is putting cash to
good use, and based upon this week's price weakness, I
be looking for a lower value level at which to add to this
position next week.
SBC Communications (SBC:NYSE, $24.46, 170 shares, 3.07%):
added 170 shares of SBC to the portfolio at $23.70 on July
11. The company is 21.6% undervalued, and my quarterly
risky level is at $29.22, which I expect the stock to
over the next six months.
An important part of SBC's business strategy is targeting
small-business customers, and this week the company
unveiled several new services that are available on
its "biz-eye-view" Web site for these customers. Current
services include advice on small-business issues, and
its customers can use to start and manage their business,
and one new feature is a relationship with UPS (UPS:NYSE)
air-express services that benefits SBC customers. In
addition, small-business customers can learn about other
SBC services on the portal, which could result in
additional revenue for SBC.
Sirius Satellite Radio (SIRI:Nasdaq, $6.73, 1,000 shares,
4.96%): This 1,000-share position was established at $4.81
on April 28. Sirius is 31.5% undervalued, and my price
target is my monthly risky level at $8.04, which I expect
the stock to achieve over the next six months.
New content is a key factor in expanding the appeal of
satellite radio, and Sirius continues to forge ahead in
this area. On Monday, Sirius Satellite Radio and the Ivy
League announced a multiyear agreement to broadcast
of the Week" for football, men's basketball and men's
hockey in Ivy League sports. Then on Tuesday, the radio
service launched its broadcast of BBC Radio 1, which gives
Sirius subscribers their first opportunity to listen to
most influential and highly acclaimed music channel from
the U.K., which includes a cutting-edge mix of pop, rock,
rhythm and blues, and hip-hop music. I preset the channel
in my car on this announcement.
Also this week, W Hotels said it was expanding its
partnership with Sirius to offer its guests the satellite
radio service. W launched "Sirius suites" in New York and
Los Angeles in February and is expanding the service to
suites in its Chicago, New Orleans, San Francisco, Seattle
and Silicon Valley hotels.
Symantec (SYMC:Nasdaq, $21.76, 400 shares, 6.42%): I added
225 shares of Symantec at $18.31 on May 11, and another
shares on July 29 at $22.10, for an average cost basis of
$19.97. Symantec is 26.1% undervalued, and my price target
is my annual risky level at $25.53, which I expect the
stock to achieve over the next six months.
The Symantec-Veritas merger yielded new benefits this
On Wednesday, Symantec released an upgraded version of a
Veritas storage product for Linux users. This is one of
Symantec's first initiatives in combining the products of
the two merged firms.
Another new offering released this week is Symantec's
security product. The service blocks unwanted spam, stops
viruses and automatically archives older emails. This
keep customers' email systems from failing.
Nasdaq 100 Unit Trust (QQQQ:Nasdaq, $39.21, (200) shares,
5.78%): On Wednesday, I added a short position of 200
shares of QQQQ at $37.34. This short was established to
protect the portfolio from the risks of the red flags that
I mentioned in the opening of this week's summary.
My price target to cover is my monthly value level at
$36.44, which my model suggests is the risk, given a
correction over the next three to five weeks. I set a buy-
stop at the QQQQ's new 52-week high at $40.50.
Semiconductor HOLDRs (SMH:Amex, $36.34, (200) shares,
5.36%): I added a short position of 200 shares of SMH at
$37.13 on Tuesday. This week's high for the Philadelphia
Semiconductor index (SOX) was just above my weekly risky
level at $474.87, which was the level I used to add this
short. This position give the model portfolio a hedge
against a further drop in the chipmakers.
My price target to cover is $34.12, my monthly value
Given a market correction, my models suggest that this
level will be achieved over the next three to five weeks.
My buy stop is the ETF's new 52- week high at $38.50.
The final edition will be sent out Wednesday morning.
Booking profits in one position and trimming three others.
Suttmeier's closing this protective position, which is no longer necessary.
The market's resilience continues as almost all sectors remain overvalued.
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After the Bell
Before the Bell
Jim Cramer's Daily Booyah
Winners & Losers