The big kahuna of the tech sector,
, will report earnings Thursday along with four companies that are at opposite extremes, according to my model.
At the cheap end of the spectrum,
is 29.4% undervalued, and
is 26.3% undervalued. At the expensive end,
is 21.4% overvalued, and
is one of the most bloated tech stocks, at 74.4% overvalued.
Thursday will be an interesting day for the
, which has regained some of the ground lost in Friday's selloff so far this week.
The Nasdaq's move from a low of 2190 on Jan. 3 to 2332 on Jan. 11, followed by a plunge back down to 2241, is characteristic of a market changing direction, particularly since the high was a failed test of my quarterly resistance level of 2331. I expect this reversal-oriented pattern to end with a test of my quarterly support level of 2159. Any advances should continue to fail between 2331 and my monthly resistance level of 2384.
So far this tech earnings season, overvalued stocks haven't sustained price gains after their reports. This will make the market's reaction to Broadcom and SanDisk interesting to watch, as these two are strong stocks that have entered their momentum phase, and positive earnings guidance must provide the fuel to maintain their mojo.
AT&T is expected to report EPS of 43 cents Thursday morning. AT&T, which is rated a buy according to ValuEngine, is trading 29.4% below its fair value of $34.91. The weekly chart profile is flat, with the five-week MMA at $24.67 and the 200-week simple moving average at $25.16.
According to Thomson/First Call, 19 Wall Street analysts have a median price target of $26 with a high target of $30; my model says this stock is stronger. I've been looking for a trend above the 200-week SMA, and the reaction to this earnings report should provide that catalyst. Otherwise, there will be risk to my monthly value levels of $22.19 and $21.38. Long-term investors should consider buying AT&T if it drops that far.
Broadcom, a maker of semiconductors for wireless broadband communications, is expected to report EPS of 44 cents after the close Thursday. ValuEngine says Broadcom is a hold. It's 21.4% overvalued, with fair value at $47.56. The weekly chart profile is overbought, with the five-week MMA at $52.63 and the Jan. 19 high at $59.88, which makes Broadcom a pure momentum trade.
According to Thomson/First Call, the median analyst price target is $53 with a high target of $70, which is stronger than my model. Wall Street should chime in on Broadcom after the earnings report, as the median price target is below where shares are trading. Since it's a momentum trade, I won't name risky levels. The focus should be on whether or not a negative reaction to earnings can hold monthly pivots at $56.21 and $52.36.
Microsoft is expected to report EPS of 33 cents after the close Thursday. It's rated a hold by ValuEngine and is trading 11.7% below its fair value of $29.76. The weekly chart profile shows declining momentum, with the five-week MMA at $26.80 and the 200-week SMA at $26.28. The median analyst price target is $31 with a high target at $35, which is stronger than my model. My quarterly value levels are $24.83 and $24.68, with monthly pivots at $26.93 and $27.87. A test of the quarterly value levels wouldn't be cheap enough for a 20% or cheaper undervalued reading. If it rises to $27.87, reduce holdings.
The flash storage maker SanDisk is expected to report EPS of 61 cents. It's a hold according to ValuEngine, and it is trading 74.4% over its fair value of $42.71. The weekly chart profile has rising momentum, with the five-week MMA at $65.93 and the Jan. 12 high of $79.80, which makes SanDisk a pure momentum trade.
The median analyst price target is $67 with a high target of $100, which is a much stronger profile than my model. Wall Street has a median price target well below where shares are trading, however, so look for upgrades if the earnings report is positive. Since it's a momentum trade, I'm not providing a risky level. The main issue is whether a negative reaction to earnings will result in weakness to my monthly pivot at $66.56. My monthly value level is at $53.77.
VeriSign is expected to report EPS of 26 cents. The provider of infrastructure services for Internet connectivity is rated a hold by ValuEngine. It's 26.3% undervalued, with a fair value of $28.84. The weekly chart profile shows declining momentum, with the five-week MMA at $22.04 and the 200-week SMA as a support at $17.72.
The median analyst price target is $26.75, with a high target of $34, which lines up with my model. A negative reaction to earnings could take the stock to its 52-week low of $19.01. On a positive reaction, shares should trade above my monthly pivots of $21.23 and $22.47, which could put them on the path to my quarterly risky level of $30.95.
My Metrics Explained
I evaluate the U.S. capital markets and profile all sectors, industries or specialty groups of companies. There are more than 6,000 stocks in my database.
Remember that when investing and trading in the U.S. capital markets and specific stocks, decisions should be made only after evaluating both fundamental and technical considerations. It is also equally important to manage risk/reward by having levels at which to buy on weakness and sell on strength. The way to do this is to enter limit orders to buy at a price below the market, or to sell at a price above the market.
Combining fundamentals and technicals is like trying to mix oil and water, but I believe it is necessary to do so, to the best of your ability. The levels at which to buy or sell can be used regardless of the fundamentals or technicals.
My discipline involves a three-pronged approach to measuring the risk/reward for trading or investing:
I use ValuEngine to define my fundamental ratings.
: Long-term investors should start a position now.
: Buy on weakness to a value level.
: Add to an existing position on weakness to a value level, and reduce an existing position on strength to a risky level.
: Reduce on strength to a risky level.
: Liquidate now as a source of funds.
Weekly Chart Momentum
This approach measures the technical strength of a stock.
: 12x3 weekly slow stochastic above 80 on a scale of zero to 100.
: 12x3 weekly slow stochastic rising above 20, but below 80.
: 12x3 weekly slow stochastic not rising or declining, but between 20 and 80.
: 12x3 weekly slow stochastic is declining below 80, but above 20.
: 12x3 weekly slow stochastic is below 20 on a scale of zero to 100.
Key Technical Levels
I identify these as a price at which to buy on weakness and at which to sell on strength.
Moving averages on daily charts
: The 21-day, 50-day and 200-day simple moving averages (SMAs).
Moving averages on weekly charts
: The five-week modified moving average (MMA) and the 200-week simple moving average (SMA).
Value levels and risky levels
: My model includes proprietary analytics that evaluate the past nine closes in several time horizons: weekly (W), monthly (M), quarterly (Q), semiannually (S) and annually (A).
Richard Suttmeier is president of Global Market Consultants, Ltd., chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in Lower Manhattan, and the author of
newsletter. At the time of publication, he had no positions in any of the securities mentioned in this column, but holdings can change at any time. 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. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback --
to send him an email.