What the Durable Goods Report Tells Us About Tech Demand

Last Thursday the advanced Durable Goods report for April 2009 was released by the U.S. Census Bureau. I always look for clues in the report to see what is happening in the high tech industry. What does this month's report tell us?

Whither Semiconductors?

Initially, I was pretty encouraged by the surge in semiconductor shipments in April. Shipments were up 34.4% from March. Then I plotted the data for the last couple of years in the following chart.


This chart certainly shows a significant rebound in shipments in the most recent month. Unfortunately, it doesn't yet confirm a change in trend. You could a line from the January 2008 data point to the April 2009 data point and it would pretty much result in a straight line downtrend.

A Bottom in Computers?

April resulted in continued minor weakness in the Computers and Related Products category. This is the sub-sector that includes PCs, servers and various other similar hardware. The following chart shows the data for Shipments.


Here also we fail to see a significant change in trend though an optimist would say that a bottoming formation is in the process of developing. The declines in shipments have slowed down but, as the CEO of Dell recently said, there is no sign of an upswing in computer purchases yet. It would seem, though, that we have avoided making a new low so there is hope that better days are ahead.

What about Orders?

Let's widen our scope now to the Computers and Related Products category which encompasses pretty much all the technology industry hardware manufacturers.

The following chart shows Unfilled Orders. The Census Bureau defines this as a measure of unfilled orders at the beginning of the period plus net new orders less net shipments. It is often thought of as an indicator of future production.


Unfilled orders continue fairly flat reflecting a slump in both shipments and new orders. Nothing here stands out as a catalyst for bullishness or bearishness.

The following chart shows New Orders for the Computers and Related Products category. This is typically the number everyone focuses on.


It was good to see March was revised a bit higher. It was not so good to see April come in below March. With the overall trend still down, it is disappointing to again see that we have a failure to confirm a change in trend. The good news is that we are holding well above the low established in January.

Conclusion

What can we say about the tech sector based on these charts? If you are a trend follower, you can't take much encouragement from these charts. All the trends are still down. It is known that the numbers in the Durable Goods report do bounce around from month to month so it would be foolish to ignore these trends.

If you are trying to predict where the tech sector goes from here, though, it is necessary to focus especially closely on the last few months. Here is where things get interesting. It appears that all of the charts above show that low points were hit three to six months ago. The data for Shipments and New Orders have since then have shown a struggle to establish a bottom. We now see a few months of what could be characterized as erratic performance but definitely no new lows.

It is safe to say the tech sector is on the mend. Tech stocks have performed strongly over the last few months in anticipation of a recovery. The data do not yet show a V-shaped recovery but they do seem to show some kind of recovery in its early stages.

If you believe in the predictive power of the markets, this is a good time to load up on tech. You'll note that IYW, the iShares Tech ETF, is approaching its recent high, it is solidly above its 200-day moving average and its 50-day MA has just crossed above its 200-day MA. All pretty bullish signs. Let's just hope stocks haven't gotten too far ahead of themselves.

Disclosure: long ROM, USD and IGN

Comments

[Donald Ingram:]

You may always hope! Hope springs eternal!
Caution is another word that goes with hope - as in "don't get your hopes up! To me the tech market looks like it's waiting to see which way the wind will blow, and will it be a cold Arctic front or warm balmy, tropical breezes! Good charts and article.

Jun 01 11:09 AM

[PastTense:]

"If you believe in the predictive power of the markets"

But a great many people on SA don't; instead a lot of people here are saying we are in a bear market bounce, that the economic data shows a continuing bad economy.

And your charts about the tech sector say exactly the same thing (the same bear market bounce, while the data shows a continuing bad economy).

Jun 01 12:07 PM

[jmmx:]

You say:
"The data do not yet show a V-shaped recovery but they do seem to show some kind of recovery in its early stages."

I note your equivocation on the point : "... do SEEM to show..."

To echo the above remarks, we appear to be in a time of great uncertainty, and no one has any idea at all if we will go into a second dip as all the negative forces assert themselves, or we indeed are at the beginning of a real recovery, or merely at the beginning of a long (or very long) period of a very slow recovery (or long further slide, for that matter).

These are, of course, the sum total of logical options (thank you Dr. Spock). My advice to the analysts is to pick one and stick with it. If it turns out to be the way things go you can always claim to be the "great seer." If it goes in a different direction, your errors will be drowned in the sea false seers.

Jun 01 11:11 PM

[jmmx:]

PS - for "drowned in the sea false seers." please substitute "lost and unnoticed in the vast sea of false seers"

:D

Jun 01 11:15 PM