Energy and utilities have been considered safe havens in recent years, but as I wrote Tuesday,
these sectors have deteriorated and should be sold on strength by long-term investors. It makes sense to consider rotating some assets into the tech sector.
My models project that technology stocks could lead a turnaround; at the least, they should hold up relatively well in a weak market. According to my models, the tech sector is the cheapest in the market at 13.6% undervalued, with consumer durables in second place at 8.4% undervalued. Energy is 6.4% overvalued and public utilities 5.6% overvalued.
If the stock indices are bottoming, the chart patterns favor the tech-heavy
. The Nasdaq Composite's daily chart will remain positive as long as daily closes stay above the 200-day simple moving average of 2073. A close Friday above the five-week modified moving average of 2112 would shift the weekly chart profile to neutral. Watch out, however, if the monthly chart profile shifts to negative with a close Monday below the five-month modified moving average of 2091.
Investors should keep my guidelines in mind when choosing tech stocks. The ideal stock has a cheap valuation, a positive weekly chart profile and a value level at which to add to positions on weakness. Look for a stock that's at least 20% undervalued according to my model, with a positive weekly chart profile (or an indication the chart profile is improving) and a monthly or longer-term value level at which to buy.
The reaction to
earnings Tuesday was clearly negative. Analysts gave the report the retail spin. If you consider Amazon to be just an online retailer, shares were way overvalued. Amazon was 26.4% overvalued, with fair value at $36.90 before reporting earnings. It set a 52-week high of $47.00 Tuesday on a failed test of my semiannual pivot at $46.85, which proved to be a risky area, as shares were trading at $46.17 at the close pre-earnings. A weekly close below the five-week MMA at $43.64 indicates risk to my quarterly value level of $38.99. Clearly this profile indicated that long-term investors should have booked profits at $46.85 before earnings.
Here's how to evaluate some of the stocks reporting after the close Wednesday.
is expected to report EPS of 46 cents. The software company is 30% undervalued, with fair value at $56.54. Its weekly chart profile is neutral, and a close this week above the five-week modified moving average of $41.19 will shift the weekly chart profile to positive.
Avid is cheap enough for long-term investors to buy it on weakness to its 200-week simple moving average of $37.04. Add to longs on weakness to the monthly and annual value levels of $35.56 and $33.59. A weekly close above my monthly pivot at $41.67 indicates potential to my quarterly risky level of $46.45.
( BOBJ) is expected to report EPS of 27 cents. Business Objects is 11% overvalued, with fair value at $31.26. The weekly chart profile is neutral, and a close this week below the five-week modified moving average of $33.96 will shift the weekly chart profile to negative. Investors should avoid this software maker as a close this week below monthly and quarterly pivots at $32.69 and $33.10 indicates risk to my semiannual value level of $28.39. If there is strength following earnings, I would book profits at my annual risky level of $38.59.
is expected to report EPS of 49 cents. A component in the Philadelphia Semiconductor Index, it's 4.7% below its fair value of $51.03. The weekly chart profile is neutral. A close this week above its five-week modified moving average of $48.40 will shift the weekly chart profile to positive, but a close below the 200-week SMA at $46.77 would be negative. This one can be traded, but long-term investors should sell on strength. My semiannual value level is $34.25, with quarterly and monthly pivots at $44.73 and $46.95, a quarterly pivot at $50.50 and annual risky level of $62.12.
Maxim Integrated Products
is expected to report EPS of 39 cents. Maxim is 16.4% undervalued, with a fair value of $48.96. The weekly chart profile is negative, and a weekly close below its five-week MMA of $41.43 keeps the weekly chart profile negative, but a close above the 200-week SMA at $42.49 would be positive. Investors should consider buying Maxim on weakness if shares fall to 20% undervalued and my semiannual value range between $39.97 and $37.70. On a positive reaction, the upside is to my quarterly risky level of $49.06.
( MFE) is expected to report EPS of 29 cents. McAfee is trading 33% over its fair value of $24.30. The weekly chart profile is neutral; a close this week below its five-week MMA of $30.84 would shift the weekly chart profile to negative. With shares so overvalued, investors should book profits on strength to my annual risky level of $42.02. My annual value level is $25.59, with semiannual and quarterly pivots at $29.41 and $33.30.
is expected to report EPS of 30 cents. The software giant is 16% undervalued, with fair value at $29.79. The weekly chart profile is negative, but a close this week above the five-week MMA of $25.34 would shift the weekly chart profile to neutral. If shares stay between my quarterly pivots at $24.96 and $26.72 following earnings, it would be a positive and indicate potential to my semiannual risky level of $32.75.
is expected to report EPS of 4 cents. RealNetworks is 57.6% overvalued, with fair value at $19.20. The weekly chart profile is positive and will remain so with a close this week above the five-week MMA of $6.70. My quarterly value level is $5.07, with the 52-week high at $8.50. RealNetworks becomes a momentum play if shares see a new 52-week high following earnings. RealNetworks was placed on the shelves of my Tech Stock Five & Dime at $5.41 on
XM Satellite Radio
( XMSR) is expected to report an EPS loss of 66 cents. XM is trading at 15.2% below my fair value of $36.39. The weekly chart profile is negative and a close this week below the five-week MMA of $32.76 would keep it negative. Longer-term investors should look to buy on weakness to my semiannual value level of $27.76. A monthly pivot is $34.93. My quarterly risky level is $48.31.
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.