Tech Fundamentals Downtrend: The End of the Trend Is Near

Wednesday's Durable Goods reports surprised to the upside and helped the stock market regain some of the previous few days' losses. The following is our analysis of what the report says about the tech sector.

Semiconductors

In April, Semiconductors put together a surprisingly strong month with Shipments showing a 34% gain over March. This month, Semiconductors gave a little back. The following chart reflects an upward adjustment for April and a very modest drop-off in May. Though the trend is still clearly down, the appearance of a bottom is finally coming into view.

Computers

This month's outstanding performance belongs to the Computers and Related Products category where New Orders surged 9.4% after dropping mid-single digits in the previous two months. The chart below reflects a downward adjustment in April and the nice move upward in May. This chart shows the clearest evidence of the downward trend finally being broken.

Shipments in this category also seem to be stabilizing and reversing the down-trend. The following chart shows Shipments reaching their nadir back in November 2008 and struggling to maintain a positive direction since then.

A view of the entire tech sector

Pulling back from individual sub-categories to look at the high tech manufacturing sector as a whole, the following charts look at the Computers and Electronic Products category. This includes computers and semiconductors, computer peripherals, communications equipment, storage, audio/video, navigation equipment, medical equipment and measurement and control instruments.

The good news in the tech sector as a whole is that New Orders were up 2.2% in May. This is twice the Durable Goods headline number that served as a catalyst to propel the stock market higher today. The following chart shows New Orders hitting their low in January 2009, bouncing back and stabilizing at what is a historically low level.

Shipments for the tech sector as a whole, however, are still weak. This next chart shows what could be a bottom but there are really only two data points for bulls to hang their hat on and neither one is especially outstanding. It can be assumed that a large percentage of New Orders may have been canceled and hence never turned into shipments.

Conclusion

Last month we reviewed a set of similar charts and concluded that tech was making an erratic effort to put in a bottom despite the fact that trends in shipments and new orders appeared to still point downward. This month, the signs are a bit clearer that, indeed, the worst is behind us.

The upswing in New Orders for Computers is certainly good news, especially for companies like Dell (DELL) and HP (HPQ). Furthermore, this will have to translate into real shipments in Semiconductors eventually (is Intel on your watch list?). So in this case we should get improvement in two sectors.

The shadow hovering over this sunny scenario, however, is the possibility of order cancellations. Inventories have been dropping for many months now so that risk should be lessening; nevertheless, with today's tightly managed supply chains, an uptick in unemployment or some other macro-economic stumble could pull the rug out from under the sector.

Overall, the picture these charts paint is quite encouraging. If you accept that the worst is now behind us in the tech sector, then it would make sense to be scaling into tech stocks and tech-focused ETFs. Some might argue that the fundamentals do not quite justify current prices but it is clear that growth stories are lurking in this sector and growth is seldom cheap.

Disclosure: long ROM, USD and IGN

Comments

[TradingHelp...:]

Agree. We may not be able to fix the structural problems in the economy but technicals. momentum and investor confidence can still make things happen in equities, I also think tech stocks could see a rally.

Jun 25 01:12 PM

[Larry House:]

I think tech is a good place to be when things start to move. I don't think tech can buck a correction, and I still think stocks will be weak this summer. I am not in a hurry to buy anything--even tech.

Jun 25 02:00 PM

[Moon Kil Woong:]

As you can see, the market is waiting the seasonal summer uptick in demand. All pundits will claim it's a sign of a turnaround due to MoM improvement. Real investors ought to be wary.

The author is right to keep an eye on high tech. It is the one sector that is most crucial for any real turnaround. If it doesn't recover you can kiss any recovery away.

Jun 25 08:22 PM

[sethmcs:]

Tech is a mature sector now and the real growth story is over for computers and related hardware. The economy needs a brand new must have technology to move forward.

Jun 26 01:07 AM

[Jake Kimble:]

I believe that tech is the sector to be in for the rebound. However, the recent market rally has jumped 40% its bottom in March on "less worse" news, not a 40% increase in company earnings + economic data.

Tech has outperformed the market this year, and since the bottom. I agree that we could be seeing a bottom in the data you presented above, but tech has rebounded prior to this. The question remains: is this market rally sustainable? Only time will tell, but the fundamental data of tech is nearing the bottom.

Good Article. check out bullishbankers.com for some tech articles I wrote: specifically on Qualcomm where I wrote about the signals of a bottom in semiconductors.

Jun 26 12:43 PM

[Spook:]

MoM growth can be misleading, take the example above, computer order surge after a 9.4% drop in previous 2 months, the order that supplier is seeing now are destine for store in preparation for back to school, there was a report weeks ago that market does not expect a strong BTS this year, its possible. Irrespective of how economy cycle, student going to college will continue to drive a seasonal buying cycle. But after this, the projection for Black Friday order and delivery is bleak at the moment.

Jun 29 08:59 AM