Don't take just one week of vacation in August. Take two.
Few portfolio managers have made money consistently this summer. As a rule, it has paid to keep the bets small and take profits quickly. The following three major factors can be blamed for the recent seesawing psychology evident in the technology tape:
Fundamentals are not as universally strong as technology investors hoped before earnings season began in July.
The news flow will slow to a trickle.
The supply of stock is flowing in torrents.
1) Fundamentals Are Not as Universally Strong as Technology Investors Hoped Before Earnings Season Began in July.
By our count, $173 billion was lost in 85 fundamental disappointments in technology issues in the June quarter. Twenty-two of these companies disappointed investors enough that they caused more than $1 billion in shareholder wealth to be lost in a single day. This number was far greater than the number of "substantial disappointments" reported in either of the last two quarters.
The vast majority of the wealth ($95 billion) was lost in the stocks of the three largest wireless handset makers: Nokia, Ericsson* and Motorola. The fundamental disappointments announced by legacy systems software and service providers also caused an impressive amount of wealth to be vaporized. The "Legacy 6" (Computer Associates, BMC Software*, Compuware*, EDS, Computer Sciences and Unisys) accounted for $28 billion of the blood spilled in the second-quarter disappointment season. Overall, seven separate pockets of weakness emerged in July, including:
Wireless handsets
Semiconductor capital equipment order momentum (for companies focused on the back end such as Kulicke & Soffa Industries*, Teradyne, Amkor Technology* and ST Assembly Test Services)
Legacy systems management software
Traditional data center services
PCs
Dot.com advertising
E-tailing
The first two pockets of weakness have contributed a good amount of trepidation among semiconductor investors. In particular, the wireless handset segment has done more than any other end market to drive both incremental growth in chip consumption and capacity-expansion announcements by chipmakers. The gut-wrenching downdraft suffered in the semiconductor sector suggests that many observers have begun to question whether bargaining power has peaked in the sector or whether the cycle will face a premature demise.
2) The News Flow Will Slow to a Trickle.
The July earnings season, despite its blemishes, at least managed to quench the insatiable thirst of technology investors for concrete reads and information on the companies in which they invest. However, during the coming weeks, technology investors will find themselves confronted by a news-flow desert.
July is always rich in news flow, with the vast majority of technology companies delivering financial reports. August is always less newsworthy. The week of Aug. 7 included financial reports from technology kingpins Cisco Systems*, Applied Materials* and Dell Computer* . All three companies reported results that were almost precisely in line with Wall Street's "whisper" expectations. However, all three stocks declined significantly in the aftermath of their reports. Early last week, Network Appliance** reported stellar, upside-surprising, estimate-increasing results. The stock fell $6 to $85. After successive beatings, few traders are still willing to buy stocks merely in the expectation of a strong earnings report. Of course, in keeping with the rule that stocks often will do whatever will cause pain to the largest possible number of people, Hewlett-Packard, BEA Systems** and Portal Software** all responded well to good earnings news despite decidedly sloppy trading action in advance of their reports.
In late August and September, the news flow typically slows to a trickle. It is also typical that the June quarter, which is not the strongest quarter seasonally for technology spending, will raise concerns about the fundamentals in some technology sectors. As a result, many stocks are subject to an unusual amount of scrutiny in September. .......
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