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Bad Breadth and Smelly SOX


Reminiscent of Spring 2000, the Nasdaq index is once again priced for perfection. One thing is certain: Perfection Can't Last.


Of the 400 NASDAQ points we're up this year, 206 came from three stocks.

  • Apple (AAPL): 127
  • Research in Motion (RIMM): 47
  • Google (GOOG): 31

Tip of the hat to Toddo for that fact.

The Nasdaq Index was up 47+ points Tuesday. Inquiring minds are asking how many of the 100 stocks that make up the index participated in the rally. The answer was 47 (headed into the close). This means we had a sizeable rally with limited participation (bad breadth).

Tip of the hat to Prof. Sedacca for pointing this out.

Smelly SOX

Click on chart to enlarge.

The $SOX is up for the year but barely. It would not take much at this point to put it into the red.

Broadcom (BRCM) Daily Chart

Click on chart to enlarge.

Broadcom is 9.25% of the $SOX. So even within Ol' Smelly, it pays to be selective. However, after hours Broadcom was down 11% to $37.35 so we may find out Wednesday that semiconductors are no longer positive for the year.

Semiconductor PEs & SOX Weightings

  • Altera (ALTR): PE 24.81 - 5.17%
  • Advanced Micro (AMD): PE negative - 3.05%
  • Broadcom (BRCM): PE 97.36 - 9.25%
  • Intel (INTC): PE 25.21 - 5.91%
  • KLA (KLAC): PE 20.32 - 11.84%
  • National Semiconductor (NSM): PE 24.44 - 5.83%
  • SanDisk (SNDK): PE 101.07 - 9.78%
  • Xilinx (XLNX ): PE 24.58 - 5.75%

Those seven make up 57% of the $SOX index and I see no bargains even after this substantial pullback from the summer highs. Where's the value?

Other Notable PEs

  • Amazon (AMZN): 139
  • Google (GOOG): 55.91
  • Research in Motion (RIMM): 81.39
  • Apple (AAPL): 52.57

Are the implied growth rates of those four remotely justifiable?

When Will Good News Be Sold?

I keep waiting for good news to be sold. We have seen bad news finally start to matter in the S&P 500, but good news as in today's Apple earnings has been bought to excess as evidenced by excessively bad breadth.

Perhaps Wednesday is the day, perhaps not, but the after hour's indication following Tuesday's narrow rally tech love fest are pointing that direction.

Let's see if it holds, but it appears that Amazon was priced for far more than perfection. Here is the headline 3Q Profit Skyrockets:

  • Earnings for the quarter ended Sept. 30 skyrocketed to $80 million, or 19 cents per share, from $19 million, or 5 cents per share, during the same period last year.

  • Analysts polled by Thomson Financial forecast a profit of 18 cents per share.

  • Revenue climbed 41 percent to $3.26 billion from $2.31 billion in the year-ago quarter. Analysts had predicted $3.14 billion in sales.

  • Shares of fell $9.30, or 9.3 percent, to $91.52 in after-hours electronic trading, after adding $9.53, or 10.4 percent, to close at $100.82 Tuesday.

Nasdaq index buyers are dancing the same tune as Citigroup (C) CEO Chuck Prince who, right before the mammoth SIV problem started last summer, stated "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

Buyers escaping the mess in financials are now rushing head over heels into the Nasdaq Index without bothering to see what the risks are in technology. For more on this idea see Todd's post Are We At Risk?

Reminiscent of spring 2000, the Nasdaq index is once again priced for perfection. One thing is certain: Perfection can't last.

No positions in stocks mentioned.
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