Option Investor
Index Wrap

Chippers and shippers

Printer friendly version

With a market capitalization of $5.45 billion and annual revenues of $4.94 billion, you would have thought Advanced Micro Devices (NYSE:AMD) $14.86 -26.17% had suddenly become the bellwether stock for the semiconductor industry, where the Semiconductor Index (SOX.X) 396.19 -2.47% closed below the psychological 400 level for the first time since late October after AMD warned quarterly results would be "down significantly" from the third quarter.

Tomorrow, chip stocks will be active once again after AMD's chief rival Intel (NASDAQ:INTC) $22.54 -1.48%, with a market capitalization of $142.5 billion and annual revenues that totaled just over $33.3 billion, reported quarterly earnings and sales that exceeded Wall Street's estimates.

But the market's reaction to AMD's warning, and Intel's quarterly results would depict that the 500-lb gorilla, Intel, has been cutting prices to clear out inventory, and it wasn't sharing much of the banana cream pie with AMD in the most recent quarter.

After the closing bell, shares of Intel (INTC) rose to $23.22, a 3% gain from their closing price, after the company said earnings in the fourth quarter that ended December 25 fell to $2.12 billion, or 33 cents a share, compared to a year-earlier profit of $2.17 billion, or 33 cents a share, as profit margins eroded in part due to heightened competition. Sales rose to $9.6 billion from a previous record of $8.74 billion.

The results topped analysts' forecast of earnings for 31 cents a share and sales of $9.42 billion. "It's a terrific report. Intel is clearly the bellwether, and this report could easily turn the tech sector," said Stephen Leeb, president of Leeb Capital Management in New York.

But turn the market and reverse a losing streak that has had some hibernating bears thinking spring came on January 1?

Not so fast.....

In after-hours trade, shares of United Parcel Service (NYSE:UPS) $83.30 -0.38% fell to $80.90 after the shipper warned that an "unexpected drop" in shipping activity between Christmas and New Years, as well as severe storms in the Midwest, which raised costs and hurt delivery volume, would negatively impact quarterly results. While UPS backed its 2005 outlook, the news gave thought to economic slowing.

Fellow shipper Fedex (NYSE:FDX) $95.41 -0.18% saw its shares sink $1.31 to $94.10 as investors mulled thought over asking "what can brown do for you?"

U.S. Market Watch - 01/11/05 Close

And just as Jim Brown stated in this evening's Market Monitor, " With UPS warning that package volumes were less than expected in December this would be economically negative. If Intel's guidance is just average or cautious this balloon could quickly deflate even further," Jim's comments will most likely be on the mind of many investors in coming session, where the transports are often looked to as a key sector for economic activity.

For those interested in viewing the recent (as of 01/10/05 close) sector bell curve from wwww.dorseywright.com, I posted a 12/31/04 to 01/10/05 comparison in this morning's Market Monitor at 09:26:27 AM EST (see tonight's archive), where I would note that the Semiconductor Bullish % (BPSEMI) had reversed back lower to "bull correction" status from "bull confirmed." As of the 01/10/05 close, the Transportation/Non Air (BPTRAN) was still at "bull confirmed" status at 70.59%, but would turn "bear confirmed" from a high level of bullish risk with a reading of 68%.

While there was little "good news" in today's session, the bullish side of me, which begets more bearish profiles in my Market Monitor profiles, the continued flattening of the yield curve begins to feel, and perhaps look like a python constricting around a bull's neck.

Each day, the yield curve flattens, stocks sink a little lower.

Market Snapshot / Internals - 01/11/05 Close

And the "python" may be squeezing harder at the NASDAQ, where new highs and new lows, at times, were almost break even as buyers would appear less willing to press higher, while sellers get aggressive with annual disappointments that are nearing 52-week lows.

Traders can perhaps sense some "capitulation" taking place, but its not the bullish "I can't stand the pain anymore," type of capitulation. Its the "I can't stand the erosion of profits anymore," type of capitulation, where a January effect rally begins to fade with each passing day.

I struggle with this too, as I know it can happen. Do I lock in gains on 3M (MMM) $84.71 +0.91% as it suddenly becomes a salmon swimming against the other 29 in the school?

A falling 10-year and 30-year treasury yield shouldn't hurt the homebuilders, but here too there are gains that could be washed out to sea if the tide of selling gains further momentum.

A put trade I profiled on Adobe Systems (NASDAQ:ADBE) $58.12 -1.19% wasn't because I viewed something overly wrong with the stock, or the software group, but largely on some technical weakness, where HUGE BULLISH gains may have bulls more willing to sell than risk some very handsome profits.

In this morning's 09:00 AM EST, you may have noted that the NASDAQ-100 Bullish % ($BPNDX) reversed back lower to "bull correction" status. Let's quickly review the NDX.X point and figure chart (conventional 25-point box), to put things in perspective.

On the following chart, I've also added some inflection point NASDAQ-100 Bullish % ($BPNDX) readings from the stockcharts.com bullish % chart, and our own NASDAQ 10-day NH/NL ratio readings. You an I can wonder all we want as to "what is going on?" But one thing that should be obvious is that some bullish risk is being removed, at a higher level of bullish risk.

NASDAQ-100 Index (NDX.X) Chart - 25-point box

Technical support should be strong above 1,500, where in early November, the NDX.X triggered a triple-top buy signal at 1,525.

Remember that the 10-day NH/NL ratios, and the bullish % can only go as high as 100%, and over the past two years, we can see how at higher levels of NH/NL ratio and bullish %, the MARKET has systematically removed "excessive bullish risk."

While we can NOT equate PRICE directly to any bullish % reading, we can see that even as recently as this past August (red 8) and September (red 9) how BOTH the Bull % and the NH/NL ratios were signaling a resumption of strength.

Where will the strength MOST LIKELY HAVE TO COME FROM?

My thoughts continue to be it will "have" to come from the Semiconductors, and or the biotechs.

According to Dorsey/Wright and Associates, their Biotech Bullish % (BPBIOM) is still in "bull alert" status at 50% after reversing up from 16% in early August (just after red 8). It would take a higher reading of 58% to achieve "bull confirmed" status, or a reversing lower reading of 44% to turn back lower to "bear confirmed" status.

My thought process is this. Money can rotate to the LOWER risk bullish % groups like the Semiconductors and Biotechs. By RISK I mean their sector bullish % readings. This would be a "logical" rotation of capital.

Now, that thought becomes challenged right now, when thinking about the YIELD curve flattening. Why is capital flowing into Treasuries? Low inflation? Aversion of RISK? Economic slowing? Which was suddenly realized on January 1?

Here's the NASDAQ Composite 52-week High/Low 10-day average chart, so you can see the movements of both the "f"ive-day and 10-day NH/NL readings, then tie them back with the inflection points I noted in the above NASDAQ-100 Index (NDX.X) chart.

Where would YOU look for the "f"ive day NH/NL ratio to show some type of stability?

NASDAQ NH/NL Chart - 01/11/05

In last Thursday's Index Trader Wrap (01/06/05) we looked at the NYSE NH/NL Chart, and tonight's focus is more NASDAQ related.

As an answer to my question of "where would YOU look for the five day NH/NL ratio to show some type of stability," the above chart would suggest 52%.

Again, we can NOT make direct PRICE and bullish % correlations, but I could perhaps begin making some plans for an NDX.X trade at/near 1,500 should the 5-day NH/NL ratio reach 52%.

Each day, when we post the Market Snapshot, we can measure the day-to-day "rate of change" in the 5-day and 10-day NH/NL ratios. Think of them just like you would a simple moving average.

Pivot Matrix -

I thought the BIX.X hinted at some strength this afternoon when between 02:10-02:15 PM EST they looked to be leading a late- afternoon comeback. One observation I immediately made in the Market Monitor was that the OEX.X had rebounded from its then session low of 563.49 to trade up to that sliver "zone of resistance" from 566.60-566.79 from the WEEKLY/MONTLY Pivot retracement (see today's 11:00 AM EST Update).

For me, the BIX.X has been a sector that has been a pretty good group to signal any type of renewed strength for the OEX/SPX and even the INDU. It would really take something above 375 on a technical basis to have me believing that the MARKET still believes the December highs can be taken out to the upside.

Another item of note would be this morning's high VIX.X trade of 13.68. When I think back to past comments of floor traders still viewing VIX.X 14.00 as a low premium that they would be buying calls in, they were perhaps still doing that today.

Despite the weakness from AMD, we can perhaps think that SOX.X WEEKLY S1 and MONTHLY S1 held, as traders awaited word from Intel. From here on, that has to be the line in the sand for support. If broken, it could be a looooong summer for the chips.

Jeff Bailey

Index Wrap Archives