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By Carlos Guillen

Last week, the tech sector as measured by the Philadelphia Semiconductor Index (SOX) struggled to make moves to the upside, but there were just not enough catalysts out there to lift tech stocks higher. Although there was some positive news coming from the department of labor that gave tech stocks a lift early on Thursday, the effects of the news were rather short-lived. In fact, on Friday the tech sector made a turn for the worse. On a technical basis, the SOX looks vulnerable at 310; a fall below this level may indicate that the index will likely make more moves to the downside.

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On Thursday before the opening bell, according to the Department of Labor, initial claims during the week ended September 4 totaled 451,000, which decreased from the 478,000 revised figure reported for the prior week and landed below the Street's estimate of 470,000. While the initial claims result was better than expected, it is still stubbornly high. Certainly, investors continue to be worried about the state of the economy; consumer spending, which is 70% of total GDP, is more vulnerable now as unemployment rates continue at elevated levels and as government stimuli are just about out of gas. We believe an initial claims level of less than 400 thousand would need to be reached in order to help bring the unemployment rate to a more tolerable level. However, this is just not going to occur any time soon.

Perhaps a bit encouraging for the semiconductor business, on Thursday morning Diodes Inc. (NASDAQ:DIOD) increased its revenue outlook for the September quarter. The company now expects revenue to range between $161 million and $166 million, or an increase of 8% to 11% sequentially, compared to its previous guidance of $158 million to $164 million or an increase of 6% to 10% sequentially. The Street was forecasting revenue to be approximately 161 million, so the new guidance was certainly better than expected. Moreover, the company also expects gross margin to range between 36.5% and 37.0%, higher than its previous guidance of 35.8%.

While the Diodes news was good, after the closing bell, news from National Semiconductor (NSM) did not get a good reception by the market. The company reported [see transcript] that revenue during the quarter ending on August 29 totaled $412 million, increasing 3% sequentially and increasing 31% year-over-year. So, while the revenue result was respectable, it was a bit below the Street's consensus estimate calling for $414 million. On the bottom line, National delivered earnings per share of $0.36, beating the Street's $0.35 estimate. However, the big disappointment was that National provided a weaker than expected outlook for next quarter. The company said that, in the near term, slower growth in its end markets and distribution channel, along with some likely inventory reduction, will mute the seasonal growth that it would normally see in its business during this time of the year.

Consequently, management projected revenue during the quarter ending in November to be between $390 million and $415 million, which would be approximately flat to down 5% sequentially; this guidance was also contrary to the Street's expectation that was calling for revenue to slightly increase to $419 million. Clearly, given that National's components are used in a broad range of electronic products ranging from industrial equipment, to mobile devices, to communications and networking equipment, the outlook is suggesting a short term downturn in the semiconductor industry.

Concurrently, Texas Instruments (NASDAQ:TXN) narrowed its outlook for the calendar third quarter. The company now expects revenue to be in the range of $3.62 billion to $3.78 billion, compared with its prior estimate of $3.55 billion to $ 3.85 billion. The midpoints of both ranges were the same and virtually in-line with the Street's consensus estimate of $3.69 billion. Moreover, the earnings-per-share guidance range was also narrowed; the new range is now $0.66-$0.72, compared with the prior range of $0.64-$0.74. The midpoints of these ranges were also the same and were in-line with the Street's consensus estimate of $0.69. So, while the new guidance was generally in-line with the Street's expectations, the concerning part was that management commented that on top of weakening demand for personal computers and related storage products, consumers also appeared to be buying fewer televisions than expected this quarter.

At the moment, investors remain scared and will need a significant amount of good news to bring some sense that things are going to be better. Unless there are more convincing data that point to stronger economic growth, the SOX and the general market will face significant pressure.

Source: Tech Takes a Turn for the Worse