Market Talk

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The semiconductor equipment book to bill ratio rose .11 to .67 in July. The increase in the ratio has lifted semiconductor related shares, but the increase in the ratio was more technical than fundamental.

The SOX index rebounded from support in the 530 area and is attempting to post a bullish reversal. Outside the spike in April, there has been a reluctance to take the SOX index below 500 and the index has been ranged bound over the last nine months.

The relationship between the book to bill ratio and the price of the SOX index is loose. There have been periods of high correlation and intervals of disconnect. The ratio hints the worst is over, but the upturn in the ratio is not confirmed by the growth rate of industrial production or guidance from a majority of firms. Signs of a recovery in the PC and telecom field are few and these sectors need improvement to spark demand for semiconductor product. The divergence is bearish.

The SOX is richly valued on est. earnings (99 times est. EPS), it suggests that the market’s current price reflects a recovery in semiconductor business. Based on trailing earnings (28 times trailing EPS) reflects it more reasonably priced.

Either stock prices fall to catch up to weak industry conditions or prices move sideways and allow the industry to catch up to prices. The last time INTC had earnings as weak as the current quarter, the stock was trading at a split adjusted 14. Value players still don't see value in tech.

Still, the sector is viewed as a "must own" and seen as a key to future economic growth. The SOX index is very important to overall price direction, especially the outlook for the NAS.

http://stockcharts.com/def/servlet/SC.web?c=$SOX,uu[m,a]wcolyimy[pb50!b200!a500!f][vc60][iLe12,26,9]