Semiconductors, Financials Due for a Rally

Another rally after all this misery? And in financials, no less? Am I kidding?

No I am not. Just as they were on November 25th, the underlying indicators are communicating something different from the non-stop selling, especially on the NYSE. On Friday morning, estimates were floated of a $15 BL write-down on Merrill Lynch (MER) for Q4 and the stock rallied 5% for the day. Up FIVE PERCENT on horrible news. E-Trade (ETFC) went up 50% in 2 days and Washington Mutual (WM) 40% (on merger rumors). When crushed stocks go up on horrible news it means the market's dicounting mechanism has already included the bad news in their price. Merrill's stock went up because maybe - just maybe - it's loan portfolio (and hence its risk) can finally be quantified.

We are into this selling stampede 12 days straight with just one teeny bounce. Rarely do these selling stampedes last more than 14 days, and extreme ones last up to 20. The short term oscillations have placed us right at the point where the market has bounced 10 times previously, even during the latter stages of the bear market. This has been the "close your eyes and buy 'em" level for bulls in the past.

The SPX 500 (SPY) is just below its moment of truth, the 300 day moving average, which has been the "make it or break it" level of the bull market for the last 12 years. Yes, we've broken it decisively, but we did so in 1998 too during the Long Term Capital financial bust, and the market came roaring back.

The volume in Nasdaq (QQQQ) stocks declining has peaked and is receding below its November levels. The volume in declining Nasdaq stocks in August and again in October-November was the greatest in history.

I've noticed non-confirmations sprouting up in the advance decline numbers. Less volume from sellers is taking NYSE (NY) stocks lower. Is there an underlining trend change? This appears to be the case with the NYSE - which has a large preponderance of financial stocks, the source of the current downturn. (rev. 1.11.2008). Notice the improvement in the value of credit spreads since Q42007. Adjusted for the Fed model (primarily a financials indicator) and relative to bonds, stocks are cheap, almost 47% undervalued. You have to go back to 1974 to find relative valuations this discounted.

In the other section of our portfolio, semiconductors, there has been a steady rise in the spot price of memory for a month (+4%) even though the shares have continued to drop in price with the market sell-off.

I stick by my alert: semiconductors and financials are due for a rally, especially if the Fed cuts rates aggressively (as it has indicated). The ETFs to own are the financials (UYG), semiconductors (USD), and the individual stocks American Capital Strategies (ACAS), Blackstone Group (BX), TierOne (TONE), VeriFone (PAY) (financials); FormFactor (FORM), Qimonda (QI) (semiconductors); and Yingli Green Energy (YGE), AXT, Inc. (AXTI), SunTech Power (STP), Akeena Solar (AKNS) (solars).

Comments

[NutritionFacts:]

Inclined to agree. FWIW SNDK posted a 0.9% rise on Friday. I see that on Wednesday it closed a gap that has remained open since it occurred way back in July 05.

2008 Jan 13 12:23 PM

[dectra:]

I agree about ACAS. Stock price is under it's NAV. Even the president of the company is buying back shares.

2008 Jan 14 09:26 AM

[Stock_Watcher:]

I agree on AXTI. A downgrade by Roth Captial on 1/3 brought this to the low 5's from $7 in a matter of days, but that is the only thing holding it down. When the indexes start turning towards green, this stock will be setting 52-week highs again.

2008 Jan 14 09:59 AM

[The small A...:]

The Libor/3 Month Treasury spread continues to exceed .75%. Not a good sign. There may be other shoes to drop - including issues regarding credit card write-offs and we really haven't seen CDD problems yet. While CDD counterparty defaults may not happen, if they do it could get nasty quickly. This is not Long Term Capital. That was surfing wave, this is a tsunami.

One bet appears to be pretty certain, inflation will get worse because the printing press will have to pump out those green backs overtime to pay for all the economic stimulus required to prop up the stock market which by all rights should just have its selling frenzy - a 20% down climax so things can move up again.

On the other hand maybe we can talk China into buying trillions in our depreciating dollar denominated debt at a couple percent interest rate per year?

2008 Jan 15 05:25 PM

[weiwentg:]

Tierone is not going to be Tierone for much longer. Capitalsource has agreed to purchase the rather small and unspectacular bank. I wouldn't own Tierone on its own. But, if you believe in Capitalsource's prospects (I do), there may be an arbitrage opportunity for you:

www.fool.com/investing...

2008 Jan 19 04:18 PM