AI
| Followers | 71 |
| Posts | 12229 |
| Boards Moderated | 1 |
| Alias Born | 04/01/2000 |
Wednesday, June 23, 2004 12:14:34 AM
Tuesday's Sector Update: Concerns to Note on Semiconductors
Nick Perry (regressionchannels@sir-inc.com)
6/22/2004 12:16 PM ET
This weekly feature of SchaeffersResearch.com is designed to focus on a sector that may be of interest to you. Examining the broad prospects of a group can help both those trading individual stocks as well as those trading sector vehicles like exchange-traded funds (ETF).
In a commentary published on Friday, I posted leading and lagging sector ETFs. Aside from what was discussed in the column, another point of interest was that the semiconductor group appeared on the lagging side of the one-week, four-week, and twenty-four-week graphs. This weakness over both the short-term and intermediate-term time frames is worth examining given the weight the group carries in the tech sector and in many portfolios. The weekly chart below allows us get a visual representation of this underperformance.
Since both the Semiconductor HOLDRs Trust (SMH) and iShares GS Semiconductor Fund (IGW) share similar charts I used the SMH since it trades more frequently. However, even though the charts are similar, an important distinction should be noted about the structure of these two vehicles. While iShares can be traded in one share increments (like most stocks), HOLDRs are traded in 100 share increments. (More information about these funds can be found at the HOLDRS and iShares websites.)
There are a couple of points to keep in mind on the price charts. First we see an uptrending price channel. This is nothing more than a simple way to describe the trend of the ETF. Here we can see that a steady ascent was in place from October 2002 through the beginning of this year. Now the group has broken this uptrend, which can be warning sign of underlying weakness.
Another way to measure trend is to look at a moving average of the price. This allows you to weed out some of the "noise" and focus on the overall movement. On a weekly chart, I like to look at either a 10-week or 20-week moving average. The shorter measure adjusts more quickly, while the longer measure is slower and makes it easier to see trends. In this case, I used the 20-week moving average, which shows a distinct rollover. I would use this as confirmation that the former uptrend is in serious trouble.
One bright spot for the group is that chart support exists just below the 35 level. This will be a critical test because I have another concern for the group based on sentiment.
In a nutshell, I fear that the sentiment on the group is too optimistic given the poor price action. Looking to data from Zacks shows that familiar names like Intel (INTC), Texas Instruments (TXN), Applied Materials (AMAT), Broadcom (BRCM), and SanDisk (SNDK) all carry analysts rating that are skewed to the "buy" side.
The trepidation with this is not rooted in a belief that these analysts do not know what they are saying. It is rooted in the fact that many are saying the same thing and based on simple supply and demand. Stocks continue higher as long as buying demand outstrips selling pressure. The bias of analysts can be a sign of the underlying battle between buyers and sellers. With many already urging "buy" ratings, it may be a situation where "buyers" are becoming scarce.
Another way to judge sentiment is to look at short interest. This is a monthly measure released by the Nasdaq and New York Stock Exchange that shows the number of shares sold short on each stock. While this can be a result of arbitrage or hedging, it is also a strategy employed by those who believe a stock will decline. You can gauge how "high" short interest is by comparing a stock's short interest to its average daily volume in the form a ratio. To a contrarian, higher numbers are a sign of skepticism and therefore encouraging. I tend not to become interested until the ratios push past four.
However, higher short-interest ratios are no where to be found on the underlying stocks that comprise the SMH. In fact, just one of the 20 stocks in the SMH has a short-interest ratio that exceeds four. I would consider this a concerning aspect as it too hints that many may be expecting good times for the semis.
My final cause for concern is rooted in the optimism noted repeatedly in our Schaeffer's Daily Contrarian column. The chip group has seen numerous bullish articles, which is a sign of the underlying optimism felt by Wall Street. Some recent examples of articles include the following:
Nick Perry (regressionchannels@sir-inc.com)
6/22/2004 12:16 PM ET
This weekly feature of SchaeffersResearch.com is designed to focus on a sector that may be of interest to you. Examining the broad prospects of a group can help both those trading individual stocks as well as those trading sector vehicles like exchange-traded funds (ETF).
In a commentary published on Friday, I posted leading and lagging sector ETFs. Aside from what was discussed in the column, another point of interest was that the semiconductor group appeared on the lagging side of the one-week, four-week, and twenty-four-week graphs. This weakness over both the short-term and intermediate-term time frames is worth examining given the weight the group carries in the tech sector and in many portfolios. The weekly chart below allows us get a visual representation of this underperformance.
Since both the Semiconductor HOLDRs Trust (SMH) and iShares GS Semiconductor Fund (IGW) share similar charts I used the SMH since it trades more frequently. However, even though the charts are similar, an important distinction should be noted about the structure of these two vehicles. While iShares can be traded in one share increments (like most stocks), HOLDRs are traded in 100 share increments. (More information about these funds can be found at the HOLDRS and iShares websites.)
There are a couple of points to keep in mind on the price charts. First we see an uptrending price channel. This is nothing more than a simple way to describe the trend of the ETF. Here we can see that a steady ascent was in place from October 2002 through the beginning of this year. Now the group has broken this uptrend, which can be warning sign of underlying weakness.
Another way to measure trend is to look at a moving average of the price. This allows you to weed out some of the "noise" and focus on the overall movement. On a weekly chart, I like to look at either a 10-week or 20-week moving average. The shorter measure adjusts more quickly, while the longer measure is slower and makes it easier to see trends. In this case, I used the 20-week moving average, which shows a distinct rollover. I would use this as confirmation that the former uptrend is in serious trouble.
One bright spot for the group is that chart support exists just below the 35 level. This will be a critical test because I have another concern for the group based on sentiment.
In a nutshell, I fear that the sentiment on the group is too optimistic given the poor price action. Looking to data from Zacks shows that familiar names like Intel (INTC), Texas Instruments (TXN), Applied Materials (AMAT), Broadcom (BRCM), and SanDisk (SNDK) all carry analysts rating that are skewed to the "buy" side.
The trepidation with this is not rooted in a belief that these analysts do not know what they are saying. It is rooted in the fact that many are saying the same thing and based on simple supply and demand. Stocks continue higher as long as buying demand outstrips selling pressure. The bias of analysts can be a sign of the underlying battle between buyers and sellers. With many already urging "buy" ratings, it may be a situation where "buyers" are becoming scarce.
Another way to judge sentiment is to look at short interest. This is a monthly measure released by the Nasdaq and New York Stock Exchange that shows the number of shares sold short on each stock. While this can be a result of arbitrage or hedging, it is also a strategy employed by those who believe a stock will decline. You can gauge how "high" short interest is by comparing a stock's short interest to its average daily volume in the form a ratio. To a contrarian, higher numbers are a sign of skepticism and therefore encouraging. I tend not to become interested until the ratios push past four.
However, higher short-interest ratios are no where to be found on the underlying stocks that comprise the SMH. In fact, just one of the 20 stocks in the SMH has a short-interest ratio that exceeds four. I would consider this a concerning aspect as it too hints that many may be expecting good times for the semis.
My final cause for concern is rooted in the optimism noted repeatedly in our Schaeffer's Daily Contrarian column. The chip group has seen numerous bullish articles, which is a sign of the underlying optimism felt by Wall Street. Some recent examples of articles include the following:
Discover What Traders Are Watching
Explore small cap ideas before they hit the headlines.
