Wednesday, July 16, 2008

Chip Dip

A strange day in the market, what with the airlines, financials, and Detroit automakers all operating in the green. The other head-scratcher are the semis--the silicon chip variety as opposed to the trucking kind. Looking at the chip makers, there are very few that are in the red. What's going on here?

Well for starters, Intel late yesterday reported its second-quarter profit climbed 25 percent, helped by strong sales of laptop processors. The Street took this as a good sign for investors wary of possible slowing PC demand. An analyst at Deutsche Bank reiterated his Buy rating and set a $26 price target. Although the news was good, it didn't have a drastic effect on the stock which rose today by only 1%. In contrast, shares of Altera (ALTR) gapped up by over 12% this morning on news that its second-quarter income jumped almost 22% due to higher sales and improved margins. Comparing the two charts, Altera's is much more exciting than Intel's, and that would be my pick of two. The chart shows resistance at $24 which is 10% above its current $21.65 price.

My Chip Pix
It's the general consensus of industry analysts that the chip makers will fare much better in the second half of this year, the only caveat being that the consumer can't close her pocketbook. In the past, computer sales were driven by corporate infrastructure; now, sales are much more consumer dependent. There's been plenty of jawing recently about which chip makers will fare the best based on fundamentals. If you're interested in getting in on this sector (and now could be an excellent time), I'll leave fundamental analysis to you. Besides, you should be doing this type of research anyway. Listen to Cramer!

Okay. I'll stop shaking my finger. Based purely on chartology, here are my candidates for Technical Best of Breed (TBB).

The Blue Ribbon Winners
Altera (ALTR)
is my top chip choice and frankly there aren't a whole lot of dazzling candidates, at least for now. But things are starting to look up. Broadcom (BRCM) has recovered nicely from its multi-year low, gaining over 75% since March. It's been range-bound for the past several months and is nudging up against major resistance at $30. It reports earnings after the bell on July 22nd and if investors like what they hear, a jump above $30 could make for clear sailing to the next resistance level at $36.

The Runners-up
The following aren't my top choices, but they're performing well in the “Sporting Compelling Charts” category. Included are their current prices, expected earnings dates, and earnings estimates. (A denotes after-the-bell and U is unconfirmed.)
Flextronics (FLEX): $9.20. Earnings 7/24. Earnings estimate: $0.28
Skyworks (SWKS): $10.30. Earnings 7/17 A. Earnings estimate: $0.17
National Semi (NSM): $21.30. Earnings 9/5. Earnings estimate: $0.34
QLogic (QLGC): $16.30. Earnings 7/21 A. Earnings estimate: $0.29
SatCon Technologies (SATC): $2.80. Earnings 8/04 U. Earnings estimate: -$0.07
Silicon Storage (SSTI): $3.20. Earnings 7/29. Earnings estimate: -$0.09

Sun Chips
I can't conclude a discussion of the semis without at least paying lip service to the solar guys.This group has gotten bruised along with their less exotic brethren, but even they too are starting to turn up. If you like channeling stocks, look at Evergreen Solar (ESLR) and First Solar (FSLR). Rangebound as they have been, if this group does well, expect them to break overhead resistance. Trina Solar (TSL) jumped by a whopping 12% today off major support. Other stocks with bullishly biased charts are JA Solar (JASO), SunPower (SPWR), and LDK Solar (LDK).

Other ways to dip into chips

If you're still a tad wary of picking individual stocks you can buy the SMH which is the Semiconductor ETF. The stock is bouncing off $28 major support and could be heading back towards resistance at $34. Another way to play it involves options. Yes, I know you might not want to risk playing options in this sector because who knows? If the Grinch steals Christmas this year, chip profits will definitely suffer (along with everyone else's). But there is a way to cover your butt and your profits. Assuming the stock in question is optionable, you can purchase calls on the stock and simultaneously buy puts on the SMH. The SMH puts are your hedge against downside risk.

As I said, I don't know if the chips are going to amount to more than a hill of beans in the upcoming months, but if they do, now is the time to get in on the action. Remember, if you're heavily weighted in only a few sectors, it's always a good idea to diversify your holdings especially when a promising opportunity arises. Considering today's winning sectors, I'd much rather risk diversifying into the chips than into the airlines, financials, or auto makers. (I do think, though, that when we can see the clouds clearing over the credit crisis that financials will be looking mighty attractive, but I don't think right now is the right time.)

Note on today's market action: Although the market seems like it put in a bottom yesterday, I believe this to be another bear trap. I think we need complete capitulation before a true reversal can take place and that won't happen until the VIX hits the 35 mark. That's my tune and I'm stickin' to it!

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