NEW YORK ( TheStreet) -- Stocks in the LED light space suffered a serious setback during the past two months, but there was a silver lining on Thursday. There was more bad news of the type that has caused stocks -- including Cree ( CREE) and Veeco Instruments ( VECO) and Aixtron ( AIXG) -- to sell off, but on Thursday, the activity in the LED stocks was muted.

The LED stocks, even though occupying specific niches within the lighting market, have traded as a momentum basket in recent months -- yet it seems with the lack of reaction to more bad news on Thursday, the LED stocks are at least poised to ride out the next few weeks until earnings without significantly more deterioration in share value. Cree was down 2% on Thursday, but on light volume, while Veeco and Aixtron were flat in trading in the early afternoon. Cree had also recovered slightly over the past month since the late summer/early September selloff.

The oversupply in the LCD display market -- for which LED players provide 25% of the backlighting -- and consumer electronics sector weakness more generally, have been the best friends of LED stock short traders and the worst nightmare of stocks like Cree in recent trading history. Even though Cree is only exposed at roughly 10% of its revenues to the LCD panel space, its shares dropped severely as news started coming out over the summer about a slowdon in consumer electronics and an inventory problem. The same was true for Veeco and Aixtron. Even though they are equipment makers for the LED lighting manufacturers and order growth has been strong, the slowdown in the consumer electronics space weighed heavily on their shares.


More bad news about the current state of affairs in the consumer electronics market and with the display business arrived from Asia on Thursday, with Samsung Electronic guiding to a profit drop in the third quarter, and panel maker AU Optronics ( AUO) reporting third quarter revenue lower than the previous quarter, and September revenue that was also lower.

AU Optronics was among the biggest losers on Thursday, down more than 5% and with its average daily trading volume more than doubled.

Samsung said that third-quarter operating profit would drop from the previous quarter's record high amid slowing demand. Samsung shares fell on Thursday in Asian market trading. Samsung is the world's dominant player in liquid crystal displays and flat screen TVs, the market that sank the LED stocks.

Samsung didn't provide color on the quarterly outlook, but the selloff in the LED stocks had already explained the better-late-than-never report from Samsung on Thursday. Analysts covering the electronics sector say sales data coming out of Taiwan for September previous to the Samsung and AU Optronics reports already were indicating that the short-term bear argument against these stocks was well-founded, and the Samsung and AU Optronics are corroborating what has already been assumed.

"When Samsung is saying things are weak it usually has an impact on the industry -- however, in this case, everyone knew, so the question really turns to when things will get better," said Andy Abrams, analyst at Avian Securities.

Abrams said a good portion of the negative news is already built into the equipment players like Veeco and Aixtron, but with the slowdown beginning to show itself in the panel manufacturers and chip makers, the issue is Samsung talking about things not getting better until early next year. "I'm not as negative on the stocks as much as I don't see upside, and they could languish until the beginning of next year."

A second LED stock analyst concurred, saying, "I think if anything the Samsung comments just cast doubt about the timing of the recovery and the depth of the pullback in third quarter. "Everyone knew the third quarter was tough and demand did not come back in September, but when do things snap back?"

For investors interested in the LED stock space, then, the lack of a reaction to the latest bad news from the consumer electronics players places the ball squarely in the upcoming earnings court, with Cree set to report on Oct. 19. Veeco follows on the Oct. 25. How they answer the question about the snapback, respective to their own business niches, may be the difference between an earnings positive or negative catalyst.

TheStreet's LED stock sector earnings preview will be published next Thursday, Oct. 14..

--Written by Eric Rosenbaum in New York.

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