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Disk Drive Strength

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Robbie Stephens upgraded top box maker Dell Computer (NASDAQ:DELL) to a buy rating this morning and raised the price target on shares to $35. DELL is higher on the new by about 1 percent. Separately, Compaq (NYSE:CPQ) said that it would post a profit in its fourth-quarter, rather than the loss previously projected, on better-than-expected revenues. CPQ is higher by more than 3 percent in today's session. Other box makers, such as Gateway (NYSE:GTW) and Apple (NASDAQ:AAPL), were mixed. Apple did reveal its new iMac box late in the day, which is fitted with a flat panel display.

The personal computer (PC) industry was left to the bears last year as investors grew to believe that the industry had reached a saturation point, where margins would fall and growth would decelerate. The guidance given by the box makers recently, especially from Dell, seems to suggest otherwise. But before the recent guidance and upgrades, the disk drive suppliers were refuting the argument that the PC business was on the slide. In fact, the disk drive makers have been predicting a return in demand for PCs, the same way the group predicted the last two years of trouble in the PC business.

In early 1999, the AMEX Disk Drive Index (DDX) fell at an incredibly fast rate, from 250.00 to below 100.00 later in the year. The Philly Box Maker Index (BMX), which includes Dell, Apple, Gateway, and Compaq, staged a similar sell-off a year later, when it fell from about 250.00 to as low as 74.00 last September.

After the DDX fell from its high in 1999 up around 250.00, it traded sideways for about two years, but is currently displaying signs of life for it has nearly doubled since its late-September low. However, the chart below reveals that the DDX could have a long ways to go before this move is complete.

The DDX is especially useful, as recent history shows, for gaining insight into the PC business. Most of the companies in the index are direct suppliers of components to the box makers. Those components consist of hard drives, data storage devices, and disk drives, among others. Some of the companies, such as Iomega (NYSE:IOM), supply peripheral products and aren't as closely tied to the PC cycles as the suppliers of the pieces used inside of the boxes. The components include:

Advanced Digital      (NASDAQ:ADIC)
Adaptec               (NASDAQ:ADPT)
Quantum Corp.            (NYSE:DSS)
M-Systems Flash Disk  (NASDAQ:FLSH)
Hutchinson Technology (NASDAQ:HTCH)
Iomega                   (NYSE:IOM)
Maxtor                   (NYSE:MXO)
Read-Rite Corp.       (NASDAQ:RDRT)
Sandisk Corp.         (NASDAQ:SNDK)
Storage Technology       (NYSE:STK)

As you peruse the charts of the components, you'll notice that most are trading at relative highs, and in some cases new 52-week highs. The DDX remains one of the strongest sectors in technology, which is all the more evident by today's strength. Bullish investors who are positive on the PC business might do well to continue focusing on names in the DDX index. Moreover, if the DDX accurately predicts a rebound in the PC business, as it predicted the recession back 1999, then the DDX's progress can be used to time the rebound in the box makers and track the progress of the business.

Eric Utley
Option Investor

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