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INDEX INTELLIGENCE: SOX—Chip Stocks Lead Techs Higher in May
By Frederic Ruffy, Optionetics.com
5/31/2005 4:45 PM EST

http://optionetics.com/articles/article_full.asp?idNo=12547

Chip stocks put in a strong showing during the month of May. During that time, the PHLX Semiconductor Index ($SOX) rallied 11.5%. That compares to a 3.2% advance in the Dow Jones Industrial Average ($INDU) and a 9.2% gain for the Nasdaq 100 Index ($NDX). Yet, although the semiconductor index outperformed last month, it is still stuck in an eight-month trading range. Furthermore, to the dismay of investors hoping for a turnaround in 2005, the SOX is in negative territory on the year. In fact, given the poor long-term performance in the group, it might take several more weeks or even months of positive new for bullish sentiment to fully return to the chip sector.

As with most sectors of the market, the PHLX Semiconductor Index moved higher last month. Thanks to a general improvement in investor sentiment, which led to strong gains across the technology sector, the PHLX Semiconductor Index was among the month’s top performers. The index, which tracks the share price performance of nineteen chip and chip equipment companies, was powered higher by strong gains in KLA Tencor (KLAC), up 16.6%, Teradyne (TER), plus18%, and Advanced Micro Devices (AMD), which rose 15.2%. A half dozen of the other SOX stocks, including the world’s largest chipmaker, Intel (INTC), rose 10% or more during the month of May.

Yet, despite the group’s strong performance, the PHLX Semiconductor Index remains mired in a trading range. The chart below shows the one-year performance of the SOX. It’s lows of the year are near the 385 level, which it visited in October of last year, January 2005, and in late April. Its highs are near 445, which was a source of resistance in the fourth quarter of last year and again during the month of February and March 2005.



Figure 1: Daily Chart, PHLX

So, while semiconductor stocks have been strong lately, a more convincing sign that a recovery in the sector is underway would occur if the chip index could move out of the eight month trading range. Figure 2 shows a longer-term view of the chip index. Even after the May rally, the index has failed to break the bearish trend. The SOX is obviously well below its all-time highs seen during the tech frenzy of the late-90s. It is also approximately 25% below highs seen a little more than one year ago.





Figure 2: Weekly Chart, PHLX

In order for semiconductor stocks to truly break out of their bearish funk, investors will probably need to see legitimate signs that conditions in the industry are improving. In that respect, Tuesday’s news from the sector might help. Altera (ALTR) and Novellus (NVLS) provided updates to investors. Altera said that it expects second quarter revenues to come in at the higher end of previous estimates. The company expects to a 4 to 5% increase thanks to strong sales of its newest products. Shares of Altera were little changed in after hours trading following the news.

However, shares of Novellus gained 3% during the regular trading session after the company issued favorable guidance Tuesday morning. The chip equipment company said it now expects earnings per share of 20 to 22 cents during the second quarter, up from earlier estimates of 17 to 20 cents a share. Novellus also expects slightly higher bookings and revenues for the quarter. The stock rose to six-week highs on the news.

In sum, the short-term action in the chip sector is bullish. The charts turned up during the month of May and companies are beginning to issue favorable guidance. Longer-term, however, the outlook is less clear because the SOX remains within a fairly obvious trading range. Until that changes, it is difficult to turn extremely bullish on the group. That, in turn, is not likely to change until investors begin to see several weeks or even months of positive developments within the semiconductor sector.


Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
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