(LED light stocks, Cree, Veeco story updated for latest Nasdaq short interest data)

NEW YORK ( TheStreet) -- Stocks in the LED lighting sector showed signs of life on Tuesday, and it was a significant change for the sector, but it didn't last. Three prominent LED stocks -- Veeco Instruments ( VECO), Cree ( CREE) and Aixtron ( AIXG) -- outpaced the gains made the broader equity markets on Tuesday, but by Wednesday and thought of a sustained rally from the group was erased.

In the case of Cree, trading volume was high on Tuesday, but it was right back down at its average volume on a losing Wednesday. The lack of trading volume in Veeco and Aixtron shares trading has been below average, and the fact that investors are swooping in to buy up beaten down shares of the LED stocks suggests that any short-term change in fortunes of the LED companies is not a signal of long-term bullishness.

In fact, the latest short interest data from the Nasdaq details an increase in bearishness on the LED lighting stocks in recent weeks, with Cree bearishness being the most intensified. It's notable that for all three LED stocks, short interest is at its highest level in more than a year. The Nasdaq short interest data is two weeks trailing, so the short interest on Cree, Veeco and Aixtron released by the Nasdaq this week is as of Aug. 31.

Cree short interest jumped from 11.5 million shares to more than 15 million shares in the two weeks ended Aug. 31. The 11.5 million short positions on Cree two weeks ago was the previous high for the past one year period, and so, the four million additional shorts added in the most recent two week Nasdaq period is notable.

Veeco short interest increased by more than 2 million shares as of Aug. 31. The increase in short interest in Veeco shares has been steady, as had been the rise of the LED stocks until the recent crash. There was only short interest on 1.6 million Veeco shares in August 2009, and at the end of August 2010, short interest had climbed to just short of 13 million shares.

Both Cree and Veeco short interest has increased considerably, even as average daily trading volume was significantly lower in both LED stocks in the most recent two week period.

The same trend holds true for Germany's LED play Aixtron, which had half its average daily volume in the two-week period reported by Nasdaq ending Aug. 31, but saw short interest increase slightly to near 3.6 million shares -- the previous two-week period was already an annual high for short interest in Aixtron shares, and last August, there was only short interest of 715,000 shares.

Weakness in consumer spending has been one of the drags on these LED stocks, which tend to trade as a momentum stock basket. The LED stocks are viewed as being highly correlated with sales in the PC display and LCD TV market. With investor sentiment recently negative on spending, all it took was signs of life from the consumer to give these stocks a little bit of a push up. On Tuesday, there were several data points related to consumer spending that were not as bad as many investors had feared.

Retail sales data, in fact, pushed the broader equity markets higher on Tuesday. In particular, Best Buy ( BBY) put up better sales numbers than expected for August and surged ahead by more than 6%. While the LCD TV sales numbers from Best Buy weren't great, in the opinion of LED stock analyst Andy Abrams of Avian Securities, the numbers were less bad than the market expected.

Similarly, Corning ( GLW) lowered its volume guidance for the display market this week, but guided the Street lower to an extent that was not nearly as bad as the worst fears. Corning shares were also outpacing the market gains on Tuesday, even as the Street was lowering estimates, with Corning shares up close to 5%.

"Corning's numbers were not as bad as they could have been and the same was true of Best Buy. Investor sentiment overshoots, we had a little bit of an overreaction last week, and so the LED stocks are getting some opportunity back today," Avian Securities' Abrams said.

Abrams downgrade of Veeco and Aixtron to a hold last week was one of the negative news flashes that sunk these LED stocks, and that slump persisted for all of last week.


While the bleeding ended on Tuesday -- and even on Monday these LED stocks had stanched the bleeding, even if gains were minor -- many analysts that cover the LED stocks remain convinced that the stocks are still in a short-term negative window within a longer-term bull scenario. Just because retail sales were better in August than the worst case scenario doesn't mean that the market is overly confident about the upcoming holiday season. An investor could make the case, and the bet, that the holiday season will be better than the dire predictions and therefore, these beaten-down stocks present a quick profit opportunity.

However, the trading volume in Tuesday's rally didn't offer support for that argument. There may have been some short-covering on the better than expected retail sales news that was part of the Tuesday rally in LED stocks.

Analysts say that the high beta LED stock plays will continue to experience volatile trading with uncertainty about the holiday season lingering for months to come. Patrick Ho, an analyst at Stifel Nicolaus, expects a narrow trading range for stocks like Veeco in the short-term.

"Consumer sentiment changes all the time and on a dime. A week ago, everyone was convinced the holiday season would be bad, and now today the retail sales numbers are a lot better than expectations, but consumer spending is not a stable number," the Stifel analyst cautioned. The analyst noted that when you review the recent commentary from tech giants like Cisco Systems ( CSCO) and Hewlett Packard ( HPQ), it reveals that corporate spending has been firm, but the same can't be said for the consumer side of the spending equation.

Stifel Nicolaus went to a hold on Veeco nine months ago, and even after the recent selloff, the Stifel analyst says it's too soon to change from a hold on an LED stock play, arguing that any short-term upside is limited by the short term downside risk. The oversupply situation in the PC and flat panel market which is been a point of debate for some time hasn't gone away with the latest batch of retail numbers or Corning's display outlook. These supply/demand imbalances are not typically one quarter phenomenon, but a several quarter correction, in the opinion of the Stifel analyst. Ho said that the uncertainty has been concentrated in the PC and LCD TV space, but the question is not whether there is a fire, but how big the fire is going to be.

Avian Securities Abrams' says that even with the better-than-expected U.S. retail sales numbers, he argues that the U.S. consumer spending outlook hasn't changed -- and, in fact, it's been Chinese spending that has carried the weight recently as the U.S. and Europe slumped. In this case, China has always been the bigger concern and will continue to be.

"We've been negative on the panel space for a few months, and unless we see a high volume run through the holiday season, inventory will still be out there," the Avian analyst said, adding that the bigger question is how much discounting goes on in China and during the holiday season in the U.S. If there is enough discounting, while the TV brands don't make much money, it drives unit volumes up, and that could help the LED stocks sooner rather than later.

Veeco management was also out speaking at an industry conference on Tuesday, presenting a familiar positive argument for its LED business: the percent of LEDs used in flat panel TVs will continue to increase even if unit volumes on TVs are slower overall.

Yet Avian Securities' Abrams says such comments can drum up some interest from investors, or at least lead to a little short covering, but he isn't betting on any quick turnaround in consumer sales and the positive read-through for LED stocks. Like many analysts, he is a bull on the long-term story for LED players based on the migration within the general lighting market to LED lighting. However, the situation for the LED stocks will continue to be dim, regardless of a one-day rally the likes of which occurred on Tuesday.

--Written by Eric Rosenbaum in New York.

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