Reading the Tells

Signals curling on an open plain
rolling down the track again.
See the sky about to rain -- Neil Young

Some serious rallies of some nice magnitude in tech. That's something we've not seen except in a rare individual name for most of this earnings season. Texas Instruments' (TXN - commentary - Cramer's Take) talk of the inventory correction being "over" is being extrapolated to much of the rest of the semis in the analog space. Analog essentially means the chips process analog signals like the sound of your voice saying, "Hi, mom. Can you send some fresh Hatch green chile?" (No, seriously, mom, can you send some green chile?)

Making chips that can pull off such functionality is a pretty good business when it's in growth mode, as margins are high and costs fixed, so more growth translates into more earnings leverage. And growth mode has been what these companies have mostly been in, since over the last 30 years, we're constantly figuring out new applications that require processing from the analog world to the digital.

There's a real lesson here once again about "flipping it," and the importance of refuting the obvious when you're trading. Last year, I shocked a lot of hedgie friends and readers/viewers when I went from semiconductor bull to bear when the commentary on the call changed from "We can't keep up with demand" to "We're comfortable with inventories." That was the bulls' tell that they had misread the fundamental outlook as the stocks ran straight up to new highs.

A couple of months ago, the commentary on most of the semi calls went from, "We're comfortable with inventories" to "We've got warn again because of an inventory glut, but we're scaling back capacity for a bit." And that was, as I'd surmised at the time, the bears' tell that they had misread the fundamental outlook as the stocks were collapsing to new lows.

See the cycle play out right there for you. Let's stay tuned for the next turn.

At the time of publication, the firm in which Willard is a partner had no positions in the stocks mentioned, although positions can change at any time and without notice.

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At the time of publication, the firm in which Willard is a partner had no positions in the stocks mentioned, although positions can change at any time and without notice.

Cody Willard is the manager of CL Willard Capital Management, LLC. He is a regular guest on Fox News, CNBC and other networks, and he writes a monthly column for the Financial Times. He is also an adjunct professor at Seton Hall University and the author of TheCodyReport.net, a monthly stock market newsletter. Willard appreciates your feedback -- click here to send him an email.