Techs Release Earnings Into Momentum

Updating Two Key Profiles

It's also worth revisiting the profiles of two overvalued tech companies that have already reported, to update their profiles following the market's reaction.

Again, keep in mind that when profiling stocks that are fundamentally overvalued according to my model, it is more important to follow the momentum of the stock's weekly chart profile, and to use my value levels as the prices at which to add to positions on weakness and use my risky levels as the prices at which to reduce positions on strength. Overvalued stocks move higher as pure momentum trades, and can continue to move higher until they reach a risky level. In some cases, the momentum is so strong that risky levels are not yet evident.

Apple(AAPL Quote): At Monday's close at $75.00, Apple was rated a hold according to ValuEngine, and was 16.5% overvalued, with fair value at $64.37, according to my model. Shares peaked at $86.40 on Jan. 12 and traded as low as $71.10 on Jan. 27. The weekly chart profile shows overbought momentum, but a close this week below the five-week MMA at $73.33 would indicate the risk of a deeper correction.

So far this year, weakness has held between quarterly pivots at $68.70 and $72.59, but a trend below this range would indicate risk to quarterly and semiannual value levels at $55.43 and $48.01, where long-term investors should consider adding to this position. At $55.43 Apple would become 13.9% undervalued given the same fair value calculation.

According to Thomson/First Call, Wall Street analysts have raised estimates, with a median price target at $92.50 and a high price target at $103.00. My model suggests that they have overshot the fundamentals for Apple at this time. Investors want to buy Apple when it's undervalued, and that would be on weakness to $55.43 and $48.01.

Advanced Micro Devices(AMD Quote): Shares traded to a new 52-week high at $41.40 on Monday, making AMD one of the strongest momentum stocks in the tech sector. AMD is rated a hold according to ValuEngine, and remains extremely overvalued, but that's not what we are tracking right now. The weekly chart profile shows overbought momentum with the five-week MMA at $32.82. According to Thomson/First Call, Wall Street analysts have raised estimates with a median price target at $41 and a high price target at $65, so shares have reached the consensus price target. I do not have a risky level at which to reduce holdings at this time, but if there is a price correction following the current parabolic trend, the risk is to my annual value level at $28.61 at some point in 2006. This is a stock where the long-term investor should not add to positions, but should have a sell stop to protect longer-term gains and raise that stop each week as the share price rises.

My Metrics Explained

I evaluate the U.S. capital markets and profile all sectors, industries or specialty groups of companies. There are more than 6,000 stocks in my database.

Remember that when investing and trading in the U.S. capital markets and specific stocks, decisions should be made only after evaluating both fundamental and technical considerations. It is also equally important to manage risk/reward by having levels at which to buy on weakness and sell on strength. The way to do this is to enter limit orders to buy at a price below the market, or to sell at a price above the market.

Combining fundamentals and technicals is like trying to mix oil and water, but I believe it is necessary to do so, to the best of your ability. The levels at which to buy or sell can be used regardless of the fundamentals or technicals.

My discipline involves a three-pronged approach to measuring the risk/reward for trading or investing:

Fundamental

I use ValuEngine to define my fundamental ratings.
Strong buy: Long-term investors should start a position now.
Buy: Buy on weakness to a value level.
Hold: Add to an existing position on weakness to a value level, and reduce an existing position on strength to a risky level.
Sell: Reduce on strength to a risky level.
Strong sell: Liquidate now as a source of funds.

Weekly Chart Momentum

This approach measures the technical strength of a stock.
Overbought: 12x3 weekly slow stochastic above 80 on a scale of zero to 100.
Rising: 12x3 weekly slow stochastic rising above 20, but below 80.
Flat: 12x3 weekly slow stochastic not rising or declining, but between 20 and 80.
Declining: 12x3 weekly slow stochastic is declining below 80, but above 20.
Oversold: 12x3 weekly slow stochastic is below 20 on a scale of zero to 100.

Key Technical Levels

I identify these as a price at which to buy on weakness and at which to sell on strength.
Moving averages on daily charts: The 21-day, 50-day and 200-day simple moving averages (SMAs).
Moving averages on weekly charts: The five-week modified moving average (MMA) and the 200-week simple moving average (SMA).
Value levels and risky levels: My model includes proprietary analytics that evaluate the past nine closes in several time horizons: weekly (W), monthly (M), quarterly (Q), semiannually (S) and annually (A).