Broadcom, SanDisk: Bloated

The big kahuna of the tech sector, Microsoft(MSFT Quote), will report earnings Thursday along with four companies that are at opposite extremes, according to my model.

At the cheap end of the spectrum, AT&T (T Quote) is 29.4% undervalued, and VeriSign (VRSN Quote) is 26.3% undervalued. At the expensive end, Broadcom (BRCM Quote) is 21.4% overvalued, and SanDisk (SNDK Quote) is one of the most bloated tech stocks, at 74.4% overvalued.

Thursday will be an interesting day for the Nasdaq, which has regained some of the ground lost in Friday's selloff so far this week.

The Nasdaq's move from a low of 2190 on Jan. 3 to 2332 on Jan. 11, followed by a plunge back down to 2241, is characteristic of a market changing direction, particularly since the high was a failed test of my quarterly resistance level of 2331. I expect this reversal-oriented pattern to end with a test of my quarterly support level of 2159. Any advances should continue to fail between 2331 and my monthly resistance level of 2384.

So far this tech earnings season, overvalued stocks haven't sustained price gains after their reports. This will make the market's reaction to Broadcom and SanDisk interesting to watch, as these two are strong stocks that have entered their momentum phase, and positive earnings guidance must provide the fuel to maintain their mojo.

AT&T is expected to report EPS of 43 cents Thursday morning. AT&T, which is rated a buy according to ValuEngine, is trading 29.4% below its fair value of $34.91. The weekly chart profile is flat, with the five-week MMA at $24.67 and the 200-week simple moving average at $25.16.

According to Thomson/First Call, 19 Wall Street analysts have a median price target of $26 with a high target of $30; my model says this stock is stronger. I've been looking for a trend above the 200-week SMA, and the reaction to this earnings report should provide that catalyst. Otherwise, there will be risk to my monthly value levels of $22.19 and $21.38. Long-term investors should consider buying AT&T if it drops that far.