Catch a Falling Chip

This column was originally published on RealMoney on July 12 at 10:32 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

My model assumes that when stocks decline to quarterly, semiannual and annual value levels, bad news has been factored into share-price weakness. There certainly has been plenty of bad news lately in tech stocks, which may make it difficult to believe that now is a time to buy, but that is what my model indicates.

Earnings season began with a warning from Advanced Micro Devices ( AMD) last Thursday evening, as it lowered its sales guidance for the second quarter.

Other semiconductor stocks, such as Broadcom ( BRCM) and Marvell Technology ( MRVL), have gone from parabolic peaks in the first quarter to falling knives because of the options-compensation backdating scandal. On Monday, Merrill Lynch applied additional downside pressure by downgrading the sector.

The Philadelphia Semiconductor Index (SOX) traded to a new 52-week low Tuesday morning, 26% below its late-January high. This decline has left the semiconductors 15.5% undervalued.

The SOX fell below its 200-week simple moving average of 425.91 and is extremely oversold. The decline halted at 411.75, above quarterly supports at 409.51 and 401.90, and that should help stabilize the sector.

There is promising news from the Semiconductor Industry Association. Sales were up 9.4% in May year over year and 0.7% sequentially vs. April. The SIA credited global consumer demand for cell phones and other electronic devices for this strong growth.

In June, the SIA raised its 2006 worldwide sales-growth estimate to 9.8% from 7.9%. The SIA sees strong end-market demand, comfortable inventory levels and solid capacity utilization, which should provide a favorable foundation for the industry.


Philadelphia Semiconductor Index
Source: Athena Graphics

In the fourth quarter of 2005 and the first quarter of 2006, I suggested that investors reduce positions in semi stocks because they were overvalued and overbought. Now their profiles have shifted 180 degrees, and these former highfliers have become undervalued and are either oversold or getting there.

Investors should consider rebuilding positions now and adding to holdings if they fall to my value levels in the table below. It helps to use good-till-canceled limit orders to buy weakness to these levels.

Rating the Chipmakers
11 July Price Rating (-UV) / OV% Fair Value MOM 5-Week MMA Value Levels Pivots Risky Levels
Advanced Micro (AMD) $22.98 HOLD -3.90% $23.92 OS $27.37 20.80 A 26.39 Q 27.71 Q / 28.61 A
Broadcom (BRCM) $28.39 HOLD -16.70% $34.06 OS $32.73 25.17 Q / 22.11 S 36.36 Q
Intel (INTC) $18.67 HOLD -21.40% $23.75 RM $18.55 16.80 Q / 14.69 S 18.17 M / 19.10 Q 28.04 S
Marvell (MRVL) $40.91 HOLD -30.20% $58.62 OS $49.18 36.20 Q 58.38 Q
NVIDIA (NVDA) $19.15 BUY -24.70% $25.43 OS $22.34 17.88 Q 19.20 S 23.31 Q / 27.59 M
SanDisk (SNDK) $45.70 HOLD -12.70% $52.35 DM $53.62 38.07 A 48.26 A / 48.67 S 59.62 S
Texas Instruments (TXN) $29.63 HOLD 0.80% $29.40 DM $30.60 26.87 Q / 21.98 S 27.74 S / 30.64 M 33.25 Q
Key: MOM, momentum; OB, overbought; DM, declining momentum; RM, rising momentum; OS, oversold; F, flat; M, monthly; Q, quarterly; S, semiannual; A, annual. A value level is a price at which my models project that buyers will emerge; a risky level is a price at which investors are likely to reduce holdings, according to my models. A pivot is a value or risky level that has been breached in its particular time horizon; the stock will likely trade around this pivot.
Source: Global Market Consultants

P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to TheStreet.com's RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.

Richard Suttmeier is president of Global Market Consultants, Ltd., and chief market strategist for Joseph Stevens & co., a full service brokerage firm located in lower Manhattan. 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.

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