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 Nasdaq. 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 Amazon's ( AMZN) 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. Avid Tech ( AVID) 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. Business Objects ( 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. KLA-Tencor ( KLAC) 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 ( MXIM) 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.
McAfee ( 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. Microsoft ( MSFT) 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. RealNetworks ( RNWK) 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
Sept. 6. 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.