The SOX May Provide Another Warning

NEW YORK (TheStreet) -- Two economic theories I track could be in sync as October begins by providing dual warnings that the global economy is weakening, and that the stock market is vulnerable.

Dow Theory is now providing a tug-of-war with industrials near multi-year highs while transports are negative on monthly, weekly and daily charts.

In the Tech Age the more modern theory involves the leadership from semiconductors as almost every product made has a chip as a component, and recently there have been warnings that the demand for chips is weakening.

Last week earnings warnings from FedEx ( FDX) and Norfolk Southern ( NSC) caused the entire transportation sector to swoon. Last week industrials were down just 13 points, while transports were down 305 points for a weekly loss of 5.8%.

This had Dow Theorists scratching their heads as industrials set a new year-to-date closing high, while transports were closer its year-to-date low of 4847.73 set on June 4.

The tech-heavy Nasdaq set a new multiyear high last week, and on Monday the PHLX Semiconductor Sector Index, or SOX, broke below both its 50-day and 200-day simple moving averages at 390.76 and 395.58. Without a rebound into Friday, the SOX will have negative monthly, weekly and daily charts.

Chart Courtesy of Thomson/Reuters

The daily chart of the SOX ($389.00) has declining momentum with the index below its 21-day, 50-day and 200-day simple moving averages at 397.36, 390.76 and 395.58. To show the vulnerability of semiconductors my semiannual value level lags at 326.30 with weekly, monthly and quarterly risky levels at 414.54, 438.90 and 450.28.

Back on Aug. 7, I wrote Stocks in SOX: Sector Rotation Shifts to Chips and stated that despite the shift to chips investors should be aware that www.ValuEngine.com downgraded 11 components of the SOX to hold from buy.

On Aug. 28, I wrote Slim Demand for PCs Weakens Chips and included that only three stocks in the SOX had buy ratings: Intel ( INTC), Marvell Tech ( MRVL) and Taiwan Semi ( TSM).

Here I am focusing on nine stocks in the SOX providing my "buy and trade" strategies.

The above table shows data from www.ValuEngine.com covering nine Semiconductor stocks in the SOX.

Reading the Table

OV/UN Valued: The stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-Engine" rating is a strong sell, a "2-Engine" rating is a sell, a "3-Engine" rating is a hold, a "4-Engine" rating is a buy and a "5-Engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: The price at which to enter a GTC Limit Order to buy on weakness. The letters mean; W-Weekly, M-Monthly, Q-Quarterly, S-Semiannual and A- Annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: The price at which to enter a GTC Limit Order to sell on strength.

Here is my analysis of those stocks:

Applied Materials ( AMAT) ($11.35 vs. $11.28 on Aug. 7): AMAT was downgraded to hold on Aug. 7 according to ValuEngine, has a reasonable P/E ratio and is just below its 200-day SMA at $11.55. Employ a "buy and trade" strategy between the value level and risky level. AMAT was a $57 stock in April 2000 as the tech bubble was popping.

Advanced Micro Devices ( AMD) ($3.46 vs. $4.01 on August 7): AMD was downgraded to hold on August 7, but now it's a speculative buy, has a favorable P/E ratio and is well below its 200-day SMA at $5.96. Employ a "buy and trade" strategy between the value level and risky level. AMD was the victim of two bubbles; was a $48 price in June 2000 and a $42 stock in March 2006.

Avago Technologies ( AVGO) ($34.60 vs. $37.07 on Aug. 7): AVGO was downgraded to hold from buy on Aug. 7, but is now rated a buy again according to ValuEngine, has a reasonable P/E ratio and is above its 200-day SMA at $34.37. Employ a "buy and trade" strategy between the value level and the pivot and risky level.

Cirrus Logic ( CRUS) ($40.18 vs. $37.53 on Aug. 7): CRUS set a multi-year high at $45.49 on Sept. 19. CRUS has been rated a Hold according to ValuEngine, has an elevated P/E ratio and is well above its 200-day SMA at $27.00. Employ a "buy and trade" strategy between the value level and risky level. CRUS was a $74 stock in October 2000, fell to $1.50 in October 2002, and is now in deflating from a 2012 bubble.

KLA-Tencor ( KLAC) ($47.13 vs. $52.03 on Aug. 7): KLAC was downgraded to hold on Aug. 7, but it's back to a buy rating according to ValuEngine, has a favorable P/E ratio and is below its 200-day SMA at $49.84. Employ a "buy and trade" strategy between the value level and risky level. KLAC was a $97 stock in April 2000 before the tech bubble popped.

Marvell Technology ( MRVL) ($9.48 vs. $11.12 on Aug. 7): MRVL was a buy-rated stock on August 7, but is now rated a hold, has a reasonable P/E ratio and is below its 200-day SMA at $13.36. Sell strength to my semiannual pivot at $10.02. Note that Monday's close was just below my weekly value level, now a pivot at $9.51. MRVL was a $36 stock in January 2006.

NVIDIA ( NVDA) ($13.66 vs. $14.01 on Aug. 7): NVDA was downgraded to hold on Aug. 7 and is now buy-rated according to ValuEngine, has a reasonable P/E ratio and is below its 200-day SMA at $13.90. Employ a "buy and trade" strategy between the value level and pivot and risky level. NVDA was a $39 stock in October 2007.

Sandisk ( SNDK) ($45.15 vs. $41.48 on Aug. 7): SNDK was downgraded to hold on Aug. 7 and is still hold-rated according to ValuEngine, has a reasonable P/E ratio and is above its 200-day SMA at $42.85. Employ a "buy and trade" strategy between the value level and risky level. SNDK had a double bubble with a high of $84 in March 2000 and a high of $79 in January 2006.

Texas Instruments ( TXN) ($28.68 vs. $28.24 on Aug. 7): TXN was downgraded to hold on Aug. 7 and is now buy-rated again according to ValuEngine, has a reasonable P/E ratio and is below its 200-day SMA at $30.30. Employ a "buy and trade" strategy between the value level and risky level. TXN was a $99 stock in March 2000 as the tech bubble was popping.

Xilinx ( XLNX) ($34.36 vs. $33.15 on Aug. 7): XLNX was downgraded to hold on Aug. 7 and remains hold-rated again according to ValuEngine, has a slightly elevated P/E ratio and is on the cusp of its 200-day SMA at $34.04. Employ a "buy and trade" strategy between the value level and risky level. XLNX was a $98 stock in June 2000 as the tech bubble was popping.

Seven of the 10 stocks profiled here are undervalued fundamentally, with ADM undervalued by 46.2%. SNDK is the most overvalued by 21.3%. Six of the 10 stocks traded higher by 7.0% (SNDK) to 157.4% (CRUS) over the past 12 months. AMD was the biggest loser over the past 12 months down 43.9%. All 10 have upside over the next 12 months, but only by single-digit percentages.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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