| Semiconductor Watch : The SOX Index has been a source of excitement for the past several days. First, the excitement surrounded the fact that the SOX Index hit its lowest point since April last Wednesday. Now, the excitement surrounds the fact that the SOX Index has rallied 14.5% from that low, bringing it back within striking distance of its 200-day moving average at 627. As encouraging as the recent rally has been, investors certainly have plenty of reason to doubt the sustainability of the rally. Fundamentally, it was readily apparent in the Q2 earnings results, and subsequent guidance, that the semiconductor industry continues to do battle with excess inventory and lackluster end demand. In many cases, the outlook was so gloomy that it was actually perceived as a positive indicator in that investors were willing to conclude that things couldn't get much worse than they already are now. That is the line of reasoning that was proffered by Salomon Smith Barney's Jonathan Joseph who is, arguably, the industry's most influential analyst after he called the top last year. In fact, his comments have been the main source of support for the chip-related stocks today as he argued in a research note that he is finally seeing "bottoms up" support for his April upgrade of the sector; specifically, he cited the relative stability in the spot market for microprocessors and general firmness in DRAM prices. Of course, not all analysts share his optimism, and consequently, investor sentiment surrounding the chip stocks has flip-flopped repeatedly since last fall. Right now, investors are in an optimistic state, but that could change again soon if the SOX Index fails to break above its 200-day moving average. Bear in mind that the SOX has failed to do so on three prior occasions, beginning with its first try in May. Following that failed attempt, the SOX dropped 19% before mounting another run. When the second attempt failed in June, the SOX fell 20% before rebounding for a third run at its 200-day moving average, which also failed at the end of June, and was followed by an 18.5% pullback. Briefing.com points this out because the SOX has already staged a strong run from recent lows so a clean break of the 200-day moving average isn't likely to be an easy undertaking. Accordingly, investors should remain on the sidelines at this juncture to see if the technical hurdle is cleared because the near-term downside could be considerable if this fourth attempt fails.-- Patrick J. O'Hare, Briefing.com |
