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Technology Report Weekly Roundup

By Richard Suttmeier | 02/24/06 - 06:17 PM EST

The best term to describe this market is resilient. Compared with the end of 2005, weakening valuations, declining momentum on the weekly charts, and overhead resistances remain solid barriers for the technology sector, but stocks continue to show their fortitude.

On the first day of trading after the long weekend, the market tumbled. Tuesday's release of the Jan. 31 Federal Open Market Committee minutes stoked investors' fears of further rate hikes as Alan Greenspan's parting comments indicated risk of increasing inflation. But the market stabilized Wednesday after the release of a key inflation reading; the consumer price index for January, excluding food and energy, rose just 0.2% -- in line with estimates. With the Bernanke Fed focusing on economic data from week to week, we will likely continue to see this type of seesaw pattern.

Despite the market's resilience, the tech-heavy Nasdaq shows declining momentum with monthly and quarterly resistance at 2313 and 2331, which was tested at the Jan. 11 high. I still show risk to quarterly support at 2159 until the end of March.

The Philadelphia Semiconductor Index (SOX) rebounded off a test of its 50-day simple moving average at 518.28 on Wednesday, returning to its monthly pivot at 529.84 for the third time this month. The swings around a monthly pivot are simply a sign of stability, not a sign of direction up or down. The high year to date was set on Jan. 27 at 559.60, just shy of the January 2004 high of 560.48. Today's close above the five-week modified moving average at 522.27 keeps the weekly chart profile neutral. With declining momentum, the risk to my quarterly supports at 488.82 and 394.12 is just being delayed.

Within the technology sector, valuations are slightly more undervalued this week. The sector is at 5.9%, computer manufacturers at 9.4%, semiconductors at 8.3% and software at 7.0%. However, these values are still too marginal for long-term investors to put more cash to work in the sector right now.

The remaining 10 sectors continue to be overvalued: basic industries by 15.2% vs. 15.1% last week; capital goods by 9.8% vs. 9.9%; consumer durables by 3.2% vs. 4.2%; consumer nondurables by 10.7% vs. 10.3%; consumer services by 3.1% vs. 2.9%; energy by 6.7% vs. 6.6%; finance by 5.5% vs. 5.9%; health care by 3.0% vs. 3.6%; public utilities by 7.7% vs. 7.7%; and transportation by 6.3% vs. 6.8% last week.

In the model portfolio this week, I removed XM Satellite Radio (XMSR:Nasdaq), as the company was downgraded after its disappointing earnings report to sell from hold, according to ValuEngine. The company is losing too much of its resources to celebrity and price wars. I also closed the short position in the Semiconductor HOLDRs (SMH:Amex), as this hedge is no longer needed; Intel (INTC:Nasdaq) is the only remaining chipmaker in the portfolio. Last, I removed Cisco (CSCO:Nasdaq), the remaining Three-rated position, and trimmed EMC (EMC:NYSE), Intel and Time Warner (TWX:NYSE).

The benchmark Technology SPDR (XLK:Amex) ended the week down 1.3%, while the S&P 500 added 0.2%. Since its inception on April 4, 2005, the model portfolio is up 5.6% (including cash) vs. a gain of 12.1% for the XLK and 9.9% for the S&P 500. The model portfolio's closed positions are up 4.7%.

One housekeeping note: The final communique from me as author of Technology Report will be a monthly summary that will be sent out after the close on Tuesday. Effective March 1, your subscription will automatically be transferred to Internet Review, authored by James Altucher. Check the email you received last week from Editor in Chief Dave Morrow for more details, or call customer service at 1- 866-321-TSCM (8726) with any questions you may have. If you are not a RealMoney subscriber and wish to keep up with my profiles for all sectors and industry groups, please sign up for it. The only way to view updated monthly value and risky levels will be in my RealMoney columns, as new levels will be known on March 1, after the final monthly report is published.

Now let's recap all of the portfolio holdings. But first, a quick review of the model portfolio rating system: Ones are stocks that are rated strong buy or buy, are at least 20% undervalued and should be bought right now. Twos are stocks that are rated hold or better, are undervalued by at least 20%, and should be bought on a pullback in price. Threes are stocks that are rated hold or better, are undervalued by less than 20% and should be sold on strength in price. Fours are stocks that are rated sell or strong sell, are overvalued by at least 40% and should be sold on strength. Hedges are for exchange-traded funds, which do not have a rating from my model.


AT&T (T:NYSE, $27.57, 170 shares, 13.39%): AT&T, the nation's largest telecom-service provider, is experiencing strong growth in wireless, broadband and business services. On Monday, AT&T laid out its 2006 plans to expand its global network, extending coverage in Europe, Africa, Asia, Latin America and the U.S. Its strategy will allow the network to reach 97% of the world's economy, according to the company, and give AT&T an edge in acquiring and retaining corporate customers that have business worldwide. AT&T will have access points in 150 countries, and according to media reports, expects to double its DSL business client base. Also, its enhanced satellite, WiFi and wireless applications should give it a solid base for revenue growth throughout the global economy. Then Tuesday, a new service, AT&T Yahoo! Go Mobile, became available in 13 states. The service allows Cingular subscribers to access their online content and services on their wireless phone. AT&T is rated a buy, according to ValuEngine, and is 34.0% undervalued with fair value at $42.34, which is my six-month price target.


Dell (DELL:Nasdaq, $29.10, 150 shares, 12.47%): In addition to PCs, Dell makes servers, storage devices, workstations and printers. It also offers consumer electronics products, including flat-panel TVs and MP3 players, and provides software and other information technology services to corporations. On Wednesday, Dell postponed its April analysts' meeting until September, saying that it wanted to remedy concerns about earnings growth before giving an in-depth briefing to Wall Street analysts. The company has nothing new to say now, and perhaps by September there will be some solid evidence that a turnaround is feasible. Dell is rated a hold, according to ValuEngine, and is 26.8% undervalued with fair value at $39.72, which is my six-month price target.

EMC (EMC:NYSE, $13.93, 300 shares, 11.94%): EMC, the leader in storage solutions and full-service information technology, should benefit from strong demand in 2006 as major corporations upgrade their data-storage systems and networks. It was a quiet week for EMC, and shares gained 3.3%. ValuEngine rates EMC a hold, and the stock is 38.6% undervalued with fair value at $22.32, which is my six- month price target.

Intel (INTC:Nasdaq, $20.36, 150 shares, 8.73%): Intel is the world's leading chipmaker. On Wednesday, investment bank ThinkEquity Partners downgraded the company to a sell, indicating that Intel's inventory was building up. A buildup would be a warning that Intel, which supplies chips to about 80% of all computers worldwide, may have to cut prices to reduce inventories. The sell rating also included a lowered price target of $16 a share, from $26. My model disagrees with this outlook, and next week could bring some positive news for Intel. Apple Computer is set to announce new products next week, which likely will include iMacs and Mac-Minis using Intel chips.ValuEngine rates Intel a hold, and the stock is 27.8% undervalued with fair value at $28.12, which is my six-month price target.

Juniper Networks (JNPR:Nasdaq, $17.67, 175 shares, 8.84%): I still expect the networking gearmaker to benefit in 2006 as wireless providers and businesses upgrade their Internet protocol (IP) networks. This week was relatively quiet, but on Tuesday the company announced another international deal. Orcon Internet, a New Zealand Internet service provider, is deploying Juniper routers to meet increasing demand for high-speed residential and business- class DSL services. ValuEngine rates Juniper a hold, and the stock is 45.8% undervalued with fair value at $32.86, which is my six-month price target.

Symantec (SYMC:Nasdaq, $17.39, 200 shares, 9.94%): Symantec is a leader in information security, offering software, hardware and services to protect IT infrastructures. The company completed its acquisition of Relicore, a provider of data-center management software, on Tuesday. By combining Relicore's Clarity product with Symantec's storage and server software, the company expects this deal to help it create an integrated solution to simplify data-center management. ValuEngine rates Symantec a hold, and the stock is 21.1% undervalued with fair value at $22.24, which is also my six-month price target.

Time Warner (TWX:NYSE, $17.27, 225 shares, 11.10%): My focus is on Time Warner's turnaround of its America Online division. On Tuesday, the division announced that it was raising the price of its dial-up service to $25.90 from $23.95, to match the rate for its broadband services to encourage subscribers to switch to AOL's high-speed offerings. Subscribers using broadband tend to spend more time online, and AOL wants to boost usage, which is expected to increase advertising revenue. In recent weeks, AOL has announced partnerships with BellSouth, Verizon, AT&T and Qwest, and with two leading cable providers, Time Warner Cable and Charter Communications, to offer high- speed services that are expected to cover most of its current dial-up subscribers. At the end of 2005, AOL had about 19.5 million U.S. subscribers, down from 26.7 million in September 2002; about 75% of its subscribers are still on dial-up. Time Warner is rated a hold, according to ValuEngine, and is 24.6% undervalued with fair value at $22.90, which is my six-month price target.


Nasdaq 100 Unit Trust (QQQQ: Nasdaq, $41.26, (200) shares, 23.58%): I still show downside risk in 2006, so I continue to keep this short position. The QQQQs' weekly chart profile shows declining momentum, and this week's close just below the five-week MMA at $41.35 keeps this configuration negative. My target to cover is my semiannual value level of $30.44. My buy-stop is $42.75.


Richard Suttmeier

Stay Tuned for Monthly Report

The final edition will be sent out Wednesday morning.

02/28/06 - 12:39 PM EST
Making Adjustments
Stocks in Focus: CSCO, EMC, INTC, TWX

Booking profits in one position and trimming three others.

02/24/06 - 11:07 AM EST
Removing a Hedge
Stocks in Focus: SMH

Suttmeier's closing this protective position, which is no longer necessary.

02/23/06 - 10:11 AM EST
Technology Report Weekly Roundup

The market's resilience continues as almost all sectors remain overvalued.

02/24/06 - 06:17 PM EST

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