Tech Disappointers Provide Warning for 2006

The bar was set too high for tech stocks as earnings season began last week, as I indicated. Because of that, four out of the seven stocks I profiled were taken to the woodshed, one turned out to be a sidewinder and only two traded higher. And both of those fell during Friday's market reversal. After such significant action, I want to revisit those profiles, and also consider the setup for Texas Instruments(TXN Quote), which reports after the close today, and EMC(EMC Quote), which reports before the market opens on Tuesday.

Surveying the Wreckage

Tech stocks took their lumps in very volatile trading last week as Intel(INTC Quote), Yahoo!(YHOO Quote), Apple(AAPL Quote) and Motorola(MOT Quote) disappointed investors. A positive report from Advanced Micro Devices(AMD Quote) fueled a semiconductor rebound that left Intel in the dust.

But the Philadelphia Semiconductor Index failed at my monthly resistance at 535.41 for the second time within two weeks. I take that as a sign that the tech sector is vulnerable for a correction. To me, the extent of Thursday's rebound was more of a surprise than Friday's weakness.

And the Nasdaq is showing signs of a bust. It traded as high as 2332 on Wednesday, Jan. 11 vs. my quarterly resistance at 2331, fell to 2264 a week later on Jan. 18, then clawed its way back to 2311 last Thursday, Jan. 19. Friday, Jan. 20, it sank to 2248 at the close, below the five-week modified moving average at 2252. Since October, I have been anticipating Nasdaq 2300 or Bust -- or 2300, Then Bust, and Friday's reversal certainly can be classified as the beginning of a potential bust.

The tech sector is still the cheapest equities sector, at 5.5% undervalued, but this sector was 10.5% undervalued at the end of 2005. At the other end of the spectrum, the sectors that are more than 5% overvalued are basic industries, overvalued by 13.0%, capital goods by 6.3%, consumer nondurables by 7.2%, energy by 14.1%, and public utilities by 7.1%. The fact that so many sectors are overvalued indicates that there are no safe havens in this market, and with tech not as undervalued as in the past, investors need to be cautious with their tech stock selections.