Lack of demand and overcapacity have plagued the telecom business. Why then is the wireless segment on the rise? Handset manufacturers, component makers, equipment vendors, and service providers have traded well recently. Even the un-loved carriers caught a bid last week.
Anecdotal evidence of a rebound in the wireless business has been popping up in various places and from several sources. Wit Soundview raised its 2002 earnings estimates as well as its price target for Nokia (NYSE:NOK) this morning. Analysts reported strong sales in a number of Nokia's products after recent channel checks. In a related development, Nokia announced the launch of six new products during its Mobile Internet Conference this morning.
The PDA segment is abuzz with merger & acquisition talk. The Wall Street Journal reported this morning that Handspring (NASDAQ:HAND) and Palm (NASDAQ:PALM) may be engaging in merger talks. Prior to the Journal's report, PALM had been rumored to be an acquisition target of a larger tech concern, such as Microsoft (NASDAQ:MSFT) or Big Blue (NYSE:IBM). Shares of PALM are up by 122 percent from their September 21 lows.
The overriding negative in telecom and its related industries, i.e. Networking, is the recent reduction in capital expenditures. Industry analysts expect cap-ex spending to decline next year by about 25 percent. However, analysts are divided on whether spending on wireless equipment and services will decline.
The recent run in the Wireless Telecom Index (YLS.S) revealed a more bullish scenario for the wireless business in early 2002. The index has traded higher in the past seven sessions, moving solidly above the century market today. It's due for a pullback. But weakness in the sector might create a few bullish set-ups. I like it at 100, but would love it between 89 and 90.
The YLS.X is comprised of a diverse group of companies. It includes hardware types, service providers, and equipment makers. Here are the components:
PALM, NOK, Qualcomm (NASDAQ:QCOM), RF Micro (NASDAQ:RFMD), and Tellabs (NASDAQ:TLAB) have been among the better performing components in the group recently. RFMD is interesting in light of the positive news from NOK. RFMD supplies the chipsets used in cell phones.
Like I've written before, I don't like to chase stocks higher because the risk in doing so is often difficult to intelligently quantify and manage. That's why a pullback is preferred in the case of the YLS. Let it remove some of the downside risk by backing and filling down to around 89 or 90. From there, risk is easier to manage. And if the wireless business continues to improve, a retracing of recent gains should be followed by another rally.