Negative divergence. Reaction lows. Support levels. They're not the usual terms you hear from technology stock analysts. But then, this jargon didn't come from your usual analyst. It came from Wall Street's technical analysts, who don't care a whit about the latest earnings, takeover rumors, or profit forecasts. Instead, they pore over reams of market data to divine where stocks are going. And here's where their data are pointing them.
Most technical analysts are positive on the long-term outlook for the tech sector. But they say semiconductor stocks may stop moving in tandem with the rest of the sector, especially the high-flying networking and software stocks. Indeed, some say the short-term picture may be bleak for semiconductors.
On the surface, Nov. 7, Election Day, looked like a "no" vote for semiconductor stocks. The Philadelphia Semiconductor Index had its heaviest one-day volume on the downside since its launch in May, 1994. "But if these stocks were going down a lot from here, they should have been down a lot on Nov. 8, and they weren't," says Frank L. Teixeira, vice-president of market analysis for Merrill Lynch & Co. "Semis didn't hit a new reactionary low," he says. "Short-term, you still have to repair the damage to the group. But you haven't broken the long-term uptrends in a great majority of these stocks."
Stephen Shobin, Lehman Brothers Inc.'s technical analyst, agrees. But he thinks there may be more short-term slippage in semiconductors. Investor optimism is a counterindicator for technicians. And Shobin points to what's happening in the options market as a bearish sign. The volume of call options, which are bets on rising stock prices, is way up on semiconductors, he says. To some technical analysts, this means semiconductor stocks are on the way down.
AMAZING RUN. Shobin also points to a rotation among technology stocks. While the whole tech group has been rising in one giant wave over the past few years, "performance has become fragmented and selective," he says. He is positive on the networking stocks such as Cisco Systems Inc. Networking stocks "continue to look dynamic and powerful and appear to have higher price targets," says Shobin. A pickup in put activity--bets that prices will fall--has followed every pullback in the price of networking stocks, he says. "From a contrarian standpoint, that is bullish," says Shobin.
Tech stocks have had an amazing couple of years. If the technicians are right, semi stocks could be in for a rough ride. But for the rest of the tech sector, a short breather may be just what is needed to fuel another long-term run.