Sector Watch: Semiconductors Slide After Last Week's Gains

The semiconductor sector came back from a long weekend to find unfriendly investors, as the group's shares dropped after riding sky-high for the majority of last week.

Things were worse earlier in the day, as the Philadelphia Stock Exchange Semiconductor Index was down 5.7%, before rebounding somewhat. The index recently lost 2.6% to 582.47.

"I think the sector is still heading toward a bottom," said Bear Stearns analyst Charles Boucher. He added that the firm doesn't expect the bloodletting to ease until the late third quarter, or possibly later if the market worsens. "At this point were five or six months away," he said. "There are still some risks to that projection. We think a fundamental bottom would be about a 400 on the SOX. We see an upper limit on the SOX of about 1,000 (sometime in the next 2 years)."

Dan Niles, the same Lehman Brothers analyst who came bearing bad news for the semis last Monday, said today that it was too early to call the bottom. Morgan Stanley Dean Witter analyst Mark Edelstone also helped drag the sector lower as he downgraded Broadcom(BRCM Quote - Cramer on BRCM - Stock Picks) and Xilinx(XLNX Quote - Cramer on XLNX - Stock Picks) to market outperform from strong buy. He cited poor demand and rising inventory levels.

Broadcom led the charge downhill in today's session, falling $2.90, or 8.2%, to $32.48 in recent Nasdaq trading. Intel(INTC Quote - Cramer on INTC - Stock Picks) slipped 5.2%, and Texas Instruments(TXN Quote - Cramer on TXN - Stock Picks) dropped 4.4%. Xilinx was off 45 cents, or 1.1%, to $40.69.

Intel, Texas Instruments and Advanced Micro Devices(AMD Quote - Cramer on AMD - Stock Picks) are among the chip heavyweights scheduled to report earnings later this week.

Boucher doesn't think the semiconductor stocks are "particularly great buys" today. He said last Monday would have been a much better time to move in because the stocks were lower before last week's rally.

"You really want to be sensitive to the entry point," he said, adding that the stocks in this sector are likely to revisit previous lows. "I think you've got to look at valuation. It pays to be a patient."