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March 7, 2006

SOX It To Me

A day that started ugly for semiconductors just kept getting uglier, and the group went out near their lows, down about 3% as measured by the SOX. Their ugly day actually started yesterday afternoon when Texas Instruments narrowed guidance for both revenue and profit. Obviously, the perpetually perky crowd that buys these stocks were anticipating something better. However, with inventory problems arising in every corner of every electronics manufacturing sector, I'm not sure what such expectations were based on.

The three-day drop in the SOX now amounts to about 6%, and this weakness must be disheartening to bulls who were looking for tech-heavy indices like the NDX and Nasdaq Composite to break upward out of long trading ranges. Granted these latter two indices came off their lows for the day, but the charts are still looking weak. If the NDX loses its neck line (see chart), the head-and-shoulders formation can be considered to be decapitated, and a much more severe breakdown could ensue.

stock chart

A couple readers wrote to ask if I had scaled back my Intel shorts as I mentioned I might do in Friday's post. The answer is no, I have not. Despite the oversold appearance of the stock, some heavy distribution has been taking place over the passed month. Intel is still under serious selling pressure and is resting just above strong support. If it were to break support, I could see it easily reaching the mid-teens in short order (pun intended). Furthermore, the heavy distribution will likely limit any upside move. Reducing my short position simply in anticipation of the shares working off an oversold position feels like too cute a move right now.

Metals continue to throw us a mixed bag of signals. Gold slumped a couple bucks today while silver was up nearly a percent. Silver is sitting a couple days off its high while gold has yet to better its January mark. Newmont Mining appears to be oversold and is bouncing off long-term support while Pan-American silver is looking ready to roll over for a interim. Most of the time we see a close correlation between the two metals, but since they are behaving differently for the time being, I am simply playing it the way I see things. I dumped my PAAS trading position and picked up some NEM.

Bonds took a breather from their losing streak, finishing about flat. However, they did set a new intraday low. This year's slump in bond prices has certainly taken its toll on housing stocks. As a group the homeys have slumped about 20% since early January, including a 3% fall today. Interestingly enough, BMHC managed to gain a percent without working off much of its oversold position. I will be watching with an itchy trigger finger for a place to sell those shares again.

Disclosure: Long NEM; Long NEM, PAAS Calls


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