Tech Sector: Leading Indicators Say Sell, Laggards Say Buy
If you're listening to the call from ECRI, get ready to be net short certain sectors.
I always found it funny that my Instant Messenger used to light up only when there was heavy selling in the markets. All the wise guys in Tech who are typically found dreaming about their bonuses, seemingly wake up only when their dreams are interrupted (rudely) by some macro event. Until then, those who never bother to read a Zero Hedge or a Minyanville article suddenly find these to be the hottest sites to read (after Craigslist classifieds, of course). I find the same thing happening these days even though I don't manage as much money as I used to.
Tech folks I know are dazzled by Accenture's (ACN) and Oracle's (ORCL) results even as I sit here looking aghast at Advanced Micro Device's (AMD) warning and the market reaction to it (always a tell). That's the difference between those who look at macro and those who worship micro, I guess.
I tend to follow Semiconductors to pick up my cues on what will happen in Tech one quarter out while my peers sweat the Oracle call to understand what will happen next day. The difference is this: AMD is in semis, which is a leading indicator (sector), while Oracle is in software, which is a lagging sector.
Yesterday, AMD was down 13% owing to a revenue warning that it blamed on a glitch in a chip factory in Dresden, Germany. However, even as AMD was down on what should be seen as a one-time event, the rest of Tech was partying like it was 1999.
I was perplexed: Why should AMD fall if it says demand is so strong that it's unable to meet it? The answer of course: AMD was down because the best Semi analysts out there are thinking that it's unlikely to recover. These same Semi analysts (who rarely talk to their software counterparts even within the same hedge fund) were taking this AMD warning seriously as a sign of (bad) things to come in Tech; they were not selling Intel (INTC) only because its dividend yield was so rich (3.8%).
But guess what? The selling in INTC is coming and you can take it from me to the bank. INTC and all other semis are in trouble. Their just-ended quarters reflect the pain that is felt in real time in the global economy since US debt was downgraded. Their pain is instantaneous. If you want to experience that pain, just take a look at ProShares Ultra Semiconductors (USD) -- an ultra long ETF on the Semiconductor sector. It's trading like death, and it looks like it can barely hang in on up days. You can short USD until it hits $20 or so. That's a 33% drop from here. But it surely is coming before the year is out.
It is possible that yesterday's wild action in the end (where the gains at the open were wiped out by the close) meant that the dots were being connected in Tech Land this time around (at least for a day). I noticed that Tech had been the weakest sector yesterday while the Dow and S&P were putting on a brave face. Their time to join on the downside will come. It's just that tech investors are a quick-reacting, herd minded traders: They sell first and ask questions later.
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