Techs Release Earnings Into Momentum

The market is becoming a momentum market, not a value market, and investors now are chasing momentum, partying like it's 1999 heading into 2000.

We're heading into some high-profile earnings reports for technology stocks over the next couple of days, and given the current momentum environment of the sector and market, investors will do well to be forewarned and forearmed with value levels and risky levels. (These are my cues for when a stock is good to buy or sell.)

Adversely affecting valuations is the rising 30-year Treasury bond yield, which is at 4.70%, the highest level for 2006. The tech sector is the only sector currently undervalued, according to my model. But right now, it's less than 3.0% undervalued, which is not cheap considering that technology ended 2005 at 10.5% undervalued. By comparison, there are 11 sectors in the U.S. capital markets, and eight are more than 5.0% overvalued:

• Basic industries, 20.7% overvalued
• Energy, 18.0%
• Capital goods, 11.3%
• Consumer nondurables, 9.2%
• Public utilities, 9.2%
• Finance, 8.0%
• Transportation, 7.3%
• Consumer services, 5.1%

A stock that's a pure momentum play has a rising or overbought weekly chart profile. When this profile is evident, having a sell stop -- and raising that stop price each week -- provides the sell discipline to protect profits in case share price changes direction. Regardless of the fundamental or technical profiles, my value levels should be used as prices at which to add to a position on weakness, and a risky level should be used as a price at which to reduce a position on strength.

Tuesday's Postclose Reports

Google: At Monday's close at $426.82, Google was rated a hold according to ValuEngine, and was 7.2% overvalued, according to my model, with fair value at $398.04. It has been a volatile month for Google, with shares trading down from $475.11 on Jan. 11 as low as $394.74 on Jan. 24, so the stock held its fair value on weakness.

The company is expected to report EPS of $1.76 this afternoon. According to Thomson/First Call, Wall Street analysts have raised the collective bar for the company, with a median price target of $490 and a high price target of $600.

The weekly chart profile shows declining momentum, with the five-week modified moving average at $423.63. A weekly close below $423.63 would shift the weekly chart profile to negative. My model suggests that the upside on a positive reaction to earnings should be limited to monthly risky levels at $458.06 and $461.87.

An article from Sunday's New York Post is worth mentioning here: "Click Fraud Chaos." Click fraud occurs when surfers click on an advertiser's link for no other purpose than driving up the number of hits. Because Google charges advertisers based on the number of hits recorded, this click fraud drives up costs for advertisers. According to the story, Joseph Holcomb, a search marketing expert, claims that Google's revenue would be cut by 30% if the company were able to stop this practice. Google recognizes the issue, but says the impact is very small. Watch for further developments on this issue; headlines could have impact on the stock.