Are PC stocks dead on the
charts?
By Peter D. Henig
Red Herring Online
April 22, 1999
Trying to look ahead by peering in the rear-view mirror
can lead to accidents. The same can be said of making
market predictions using only technical analysis as your
guide.
Yet considering the investor
anxiety in the wake of Compaq
Computer's (NYSE: CPQ) severe
earnings shortfall and the
resignation of CEO Eckhard
Pfeiffer, perhaps only technical
analysts -- those who make their
living reading the market's tea
leaves by drawing trend lines on
stock charts -- have enough insight
to foretell where PC stocks are
headed these days.
MISERY LOVES COMPANY
When Compaq blamed its sudden earnings
disappointment on broader weakening PC demand
rather than mismanagement, the PC sector went on the
defensive. Hewlett-Packard (NYSE: HWP), IBM
(NYSE: IBM), and Dell Computer (Nasdaq: DELL)
countered Compaq by saying that they do not see
slackening demand among their own product lines.
However, near-term stock charts
show significant breakdowns in
upward momentum for the top
three PC manufacturers (Compaq,
Dell, and IBM), although
longer-term charts reveal that only
Compaq has truly hit the skids.
"They're all heading lower," says
Rick Berry, technical analyst with
J.P. Turner, "but with Compaq, I
don't see a support level until $15
to $17 per share if it breaks down
from here."
READING THE FUNDAMENTALS
Technicians and fundamentalists alike are asking how
much of the bad news is already reflected in these
stocks' prices.
Analysts who rely on fundamentals have generally
agreed that Compaq has not performed as well as its
competitors. They remain split about how soft the
overall market is, however, particularly in the face of a
booming economic landscape for technology products
and services.
"Compaq's shortfall is not representative of the health of
the industry," said Ashok Kumar, analyst with Piper
Jaffray, shortly after Compaq announced dismal
earnings. "We estimate that PC unit shipments are
down [more] for Compaq versus the broader market."
Likewise, Charles Crane, chief market strategist for
Key Asset Management and a long-time fan of
Compaq, worries that investors are too myopic in their
view of the PC sector, trading the sector's stocks based
on daily news reports rather than longer-term growth
opportunities.
TECHNICAL BREAKDOWN
Unfortunately, however, the technical chart formations
spell bear more than bull. "The six-month charts have
shown they have all broken through trend lines," says
Mr. Berry. "And as far as Compaq is concerned, it's all
downhill from here."
On the six-month daily chart, Mr. Berry points out three
key reversal days in January that signaled Compaq was
about to turn lower. The stock broke through support
levels at $40 per share after setting highs above $50,
then dropped precipitously to recent lows of $22.56.
On the longer-term 10-year chart for Compaq, the
technicals are even worse. The company broke through
support at the $30 level and didn't find ground beneath
its feet until the low $20s, breaking through a long trend
line dating back to 1996.
Although both Dell and IBM have had snap-back rallies
after falling off their highs, each PC leader remains
range-bound in its near-term trading action. According
to Mr. Berry, the two have had such long-term strong
rises that they too could be due technically for
retracements.
"IBM and Dell have parabolic rises written all over
them," says the analyst. "And parabolic rises always end
in disaster."
RESULTS MATTER
Fundamentalists would argue, however, that this is
where technical analysis diverges from reality. They say
that even though Compaq has stumbled, Dell's growth is
still strong and IBM has proven its diverse businesses
can capitalize on market opportunities.
Unlike Compaq, whose long-term trend line has been
broken, both Dell and IBM still hover at the edge of
technical support on their long-term charts. Strong news
out of either company -- such as IBM's announcement
on Wednesday that it had beat Wall Street's earnings
estimates by 14 cents, earning $1.55 per share, or $1.5
billion, for the first quarter 1999 -- could keep their
overall uptrends intact.
Not everyone is hopeful that tech stocks can sustain
their upward momentum, though, particularly in PCs.
"Companies like IBM and Intel are trading right at the
edge of their support lines," says Don Hays, market
strategist with Wheat First Union. "And if IBM breaks
down at 160, it could take a fall ... basically, we see
tech as a market underperformer over the next six to
nine months."
Compaq notwithstanding, it's not likely IBM is heading
south any time soon following its rich revenue and
earnings numbers for Q1. Share prices were up over 17
points during Wednesday aftermarket trading. |
