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Telecom Up-Tick\?

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Verizon (NYSE:VZ) reported Monday morning that it had expanded its deployment of a subscriber management system. The system is designed to increase efficiency of high-speed networks. Then, Lehman analyst Tim Luke waxed positive on equipment providers. Luke said that recent channel checks revealed that business had improved this month. Separately, Paul Sagawa of Sanford Bernstein upgraded the telecom equipment sector based on a bottom in the telecom business.

The morning analyst actions and Verizon's announcement have spurred a flood of e-mail from readers asking about the bullish prospects of the telecom business and all that is linked to it, especially telecom equipment. The Networking Index (NWX.X) was actually higher this morning before market weakness dragged the group lower. It's only fractionally lower at the time of writing, making it the best performing tech sector today.

Despite the beaten down nature of telecom and networking, I still think that the risks in these two sectors are to the downside. Don't be fooled by the cheerleading on Wall Street; a very simple relative strength comparison contradicts this morning's comments.

The North American Telecom Index (XTC.X), which is just off of a three-year low, remains one of the weakest sectors of the market. Speaking of the market, it does not agree with the opinions of Messrs Luke and Sagawa as the XTC trades lower at the time of writing.

Telecom versus The Market

Networking is no better. The group of stocks, lead by Cisco Systems (NASDAQ:CSCO), is just off of its multi-year low and no where near a positive relative strength reading. Heck, there isn't even signs of stabilization.

Networking versus The Market

No, there is no up-tick in the telecom or telecom equipment businesses. Readers need only use a simple relative strength comparison to answer that question.

Eric Utley
Option Investor

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