The Philadelphia Semiconductor Index (SOX) is beginning to look like it did in 1999 to 2000. Just like six years ago, a number of stocks have become pure momentum trades, notably
Advanced Micro Devices
We'll take a closer look at them, and at two fundamentally cheap laggards:
The Philadelphia Semiconductor Index consolidated off its Aug. 2 high at 486.34, alleviating a technical overbought condition as measured by its 12x3 weekly slow stochastic reading, which was above 80 on a scale of zero to 100. Now this reading is rising again, which sets up a potential breakout above 486.34 as early as this week.
I have been tracking the SOX for months because of its leadership characteristics. The five-week modified moving average has been above the 200-week simple moving average since July 8, and I've mentioned the importance of this several times before: The last such bullish crossover was in November 1998, and the five-week MMA had been below the 200-week SMA since September 2001. From the low of 376.64 on April 29 to the high of 486.34 on Aug. 2, the SOX is up 29.2% -- certainly a sign of a bull market for semiconductors.
My model shows that the technology sector is 13% undervalued. In second place is health care, which is only 2.2% undervalued. In contrast, energy is 15.7% overvalued, and public utilities are 8.2% overvalued. Semiconductors are 18.6% undervalued, so there is room for further gains, but you must be aware that several chipmakers are overvalued, or not undervalued enough for long-term investors unless they are willing to dollar-cost average on weakness.
Semiconductors are ripe for additional momentum gains, but you need to monitor the risk/reward to avoid getting caught long at the top like in March 2000. This requires the discipline of a trader and an exit strategy to lock in gains, or limit loses should the momentum characteristics change.
Source: Athena Graphics on Telerate Plus
The Momentum Semis
Advanced Micro Devices is 37% overvalued, and its weekly chart profile is overbought. The five-week modified moving average is $20.81 and rising. Long-term investors should book some profits on strength to my annual risky level at $24.80, shy of the December 2004 high at $24.95. A weekly close below my quarterly pivot at $23.38 provides a warning that the stock should enter a consolidation phase.
Marvel Tech is 27.2% overvalued with an overbought weekly chart profile. The five-week modified moving average is $44.52 and rising. On Friday, MRVL reached another new 52-week high at $47.95, and this week's risky level is $48.31. The key level to hold on weakness is my monthly pivot at $45.08.
National Semi is overvalued by 30.5% with an overbought weekly chart profile. The five-week MMA is $24.23 and rising. On Friday, NSM reached another new 52-week high at $26.29. Long-term investors should book some profits on strength to my quarterly risky level at $28.33. Friday's close was on the cusp of my monthly pivot at $25.96. The key level to hold on weakness is my quarterly pivot at $24.75. My semiannual value level lags at $21.81.
Texas Instruments is 9.8% undervalued, and its weekly chart profile is overbought. The five-week MMA is $31.61 and rising. Long-term investors should not add new money at this time. Friday's new 52-week high was $34.50, and the close was below my quarterly pivot at $34.21, with a lower quarterly pivot at $33.10.
The Undervalued Semis
Intel is 25.6% undervalued with a negative weekly chart profile. Intel is below its five-week MMA at $25.90, with risk to its 200-week simple moving average at $24.56. Long-term investors should consider adding to positions on weakness to my weekly and quarterly value levels at $24.87/$23.95. My monthly risky level in September is $26.55.
Xilinx is 30% undervalued with a positive weekly chart profile. The five-week MMA at $27.50 is support with the 200-week SMA at $29.99 as resistance. Long-term investors should consider adding to positions on weakness to my monthly value level at $26.86. My quarterly risky level is $32.03.
My Keys to Trading
I calculate a fair value for every stock, which is the price that a stock can trade at in a perfect world. Fair value is not a price target. Fair value is based on a stock's past data and projections for the future, including the trailing 12-month EPS, the forward 12-month estimated EPS and the yield on the 30-year Treasury. How these data points are weighted depends on a historical analysis of the stock's price history with some 17 other variables influencing the calculation, on the basis of its sector and industry group.
Weekly chart profile:
A stock with a positive profile has a weekly close above its five-week modified moving average with rising 12x3 weekly slow stochastic, which is a measure of momentum on a scale of zero to 100. A reading below 20 is oversold, while a reading above 80 is overbought.
Value levels, risky levels and pivots:
A value level is a price at which buyers should emerge on share price weakness. A risky level is a price at which sellers should reduce holdings on share price gains. A pivot is a value or risky level that was violated in its time horizon, acting as a magnet during the remainder of that time horizon. These levels are calculated in weekly, monthly, quarterly, semiannual and annual time horizon, based upon the past nine closes in each time horizon. My theory is that the closes over a nine-year period are the summation of all bullish and bearish events for that market or specific stock.
Richard Suttmeier is president of Global Market Consultants, Ltd., chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in Lower Manhattan, and the author of
newsletter. At the time of publication, he had no positions in any of the securities mentioned in this column, but holdings can change at any time. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback --
to send him an email.