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Chip industry still in a trough

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While some semiconductor industry analysts perceive that the fourth quarter is a trough quarter, but that the industry will see a pickup in business early next year, there are those that believe the chip industry is in a trough quarter and little signs of a ramp to have things higher.

Last nights release of the October semiconductor book-to-bill, which declined to 0.73 from 0.84 in September, was well below consensus of 0.84. Bookings fell to $766 million from $832 in September. Both numbers (book-to-bill and bookings) are rolling 3-month averages.

The numbers do indeed confirm one thing for the semiconductor industry, and that is there still in a trough period as orders coming in are below those orders that are being shipped out the door.

The weaker-than-expected book-to-bill does have some semiconductor stocks under selling pressure this morning and weighs stock futures lower. Semiconductor bellwethers have Dow component Intel (NASDAQ:INTC) $20.12 extending losses from yesterday's post-market trade this morning at $19.85. Semiconductor-equipment maker Applied Materials (NASDAQ:AMAT) $17.00, which edged lower at $16.81 in yesterday's after-hours session, shows a choppy trade this morning near $16.55.

This morning I'm advising equity bulls to review their trading accounts carefully and begin thinking very seriously about protecting larger gains in their accounts, and trimming down some position sizes to 1/4 or 1/2 of current size.

While yesterday's market action saw a surge in the major averages and many sectors, many of the internals we follow are now beginning to reach more "overbought" levels on their bullish % charts. The most volatile and faster moving NASDAQ-100 Bullish % ($BPNDX), full of larger capitalize technology stocks, rose to 75%. Levels above 70% are deemed "overbought" and presents higher risk levels for bullish traders. While the bullish % are not necessarily accurate predictors of stock price movement, they are excellent QUANTITATIVE measures of market/index/sector risk. Compare last night's 75% bullish reading and a NASDAQ-100 close of 1,118 to early October's reading of 14% when the NASDAQ-100 hovered just above the 800 level and the perception of risk that bears had, but now shifts to the bulls can be observed and better understood. This indicator can rise to an ultimate high of 100% and the still bullish internals at even these higher levels may not necessarily present the bearish trader with their ultimate bearish trading opportunity. The internals are very strong.

We will discuss the other bullish % reading later today at 01:00, but free charts and reading on the Dow Industrials Bullish % ($BPIND) 70%, S&P 100 Bullish % ($BPOEX) 69%, S&P 500 Bullish %, ($BPSPX) 62.80%, NYSE Bullish % ($BPNYA) 44.93% and NASDAQ Comp. Bullish % ($BPCOMPQ) 44.14% can be found at www.stockcharts.com.

Individual stock traders will begin looking for stocks that trade BELOW their bearish resistance trends and currently have a point and figure "sell signal" associated with the chart. One example of a point and figure chart that I like on the BEARISH side and has been profiled several times in our commentary is Duke Energy (NYSE:DUK) $19.08. Despite a rather powerful move higher in the broader markets, DUK trades near its October lows. Key support right now is at the $18.35 level and is where the company recently placed a secondary offering. Horizontal support at that levels continues to hold right now as most likely, the investment bank the underwrote the offering is defending that level. For new entries, I suggest a break below the $18.35 level.

Early morning tone is slightly negative with S&P futures (sp02z) down 5.8 points at 929.70. NASDAQ futures (nd02z) are off 13 points at 1,104.50 and Dow futures (dj02z) are lower by 39 points at 8,820.

Fair value for the S&P 500 today is $0.14. That price will not change during the session. HL Camp & Company has their computers set for program buying at $1.73 and set for selling at $-1.23. Fair value for the NASDAQ-100 today is $1.45.

Treasuries are seeing modest buying this morning with the benchmark 10-year YIELD edging lower at 4.129%. It is still my thoughts that equity bulls want to see this bond's YIELD above 4.15%, which was traded yesterday, but not held by the close. Equity bulls would not want to see this bond's YIELD close much below 3.94% as that type of action might then be an alert that cash is trying to seek out safety of Treasuries.

Jeff Bailey

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