The SOX May Provide Another Warning

NEW YORK (TheStreet) -- Two economic theories I track could be in sync as October begins by providing dual warnings that the global economy is weakening, and that the stock market is vulnerable.

Dow Theory is now providing a tug-of-war with industrials near multi-year highs while transports are negative on monthly, weekly and daily charts.

In the Tech Age the more modern theory involves the leadership from semiconductors as almost every product made has a chip as a component, and recently there have been warnings that the demand for chips is weakening.

Last week earnings warnings from FedEx (FDX) and Norfolk Southern (NSC) caused the entire transportation sector to swoon. Last week industrials were down just 13 points, while transports were down 305 points for a weekly loss of 5.8%.

This had Dow Theorists scratching their heads as industrials set a new year-to-date closing high, while transports were closer its year-to-date low of 4847.73 set on June 4.

The tech-heavy Nasdaq set a new multiyear high last week, and on Monday the PHLX Semiconductor Sector Index, or SOX, broke below both its 50-day and 200-day simple moving averages at 390.76 and 395.58. Without a rebound into Friday, the SOX will have negative monthly, weekly and daily charts.

Chart Courtesy of Thomson/Reuters

The daily chart of the SOX ($389.00) has declining momentum with the index below its 21-day, 50-day and 200-day simple moving averages at 397.36, 390.76 and 395.58. To show the vulnerability of semiconductors my semiannual value level lags at 326.30 with weekly, monthly and quarterly risky levels at 414.54, 438.90 and 450.28.

Back on Aug. 7, I wrote Stocks in SOX: Sector Rotation Shifts to Chips and stated that despite the shift to chips investors should be aware that www.ValuEngine.com downgraded 11 components of the SOX to hold from buy.

On Aug. 28, I wrote Slim Demand for PCs Weakens Chips and included that only three stocks in the SOX had buy ratings: Intel (INTC), Marvell Tech (MRVL) and Taiwan Semi (TSM).

Here I am focusing on nine stocks in the SOX providing my "buy and trade" strategies.

The above table shows data from www.ValuEngine.com covering nine Semiconductor stocks in the SOX.



Reading the Table

OV/UN Valued: The stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-Engine" rating is a strong sell, a "2-Engine" rating is a sell, a "3-Engine" rating is a hold, a "4-Engine" rating is a buy and a "5-Engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: The price at which to enter a GTC Limit Order to buy on weakness. The letters mean; W-Weekly, M-Monthly, Q-Quarterly, S-Semiannual and A- Annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: The price at which to enter a GTC Limit Order to sell on strength.

Here is my analysis of those stocks:

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