Friday, July 21, 2000

Semiconductor Index - SOX & Applied Materials - AMAT

One of the leading index's over the past year has been the Semiconductor Index, a.k.a "The SOX". This index over the past several weeks has become more volatile as several leading stocks in the index have broken down from their bases.

One indicator that traders look at heavily is the industries book to bill ratio, which indicates the amount of orders coming in compared to the amount of merchandise being shipped out. A ratio above one is positive as it indicates that the companies are getting in more orders then they are shipping out. In the June quarter the book-to-bill ratio was 1.26, which is down from the previous month of 1.46. Although the indicator is over 1.00 it is starting to decelerate. This indicator has to be watched very closely, as it is usually a predicator of what to expect from these companies as far as earning and sales are concerned going out several months.
Another thing that is very disturbing is that the indexes relative strength made a lower low. The relative strength gauges the strength of the index compared to the S&P 500. It's breakdown is usually a precursor to future down moves in the index. This will be confirmed if the index breaks its key support level of 1065.64. Also watch the leading stocks in the index such as; AMAT, NVLS, TQNT, and others.

Let's take a look at the chart of AMAT, one of the leading stocks in the index. First, let me note that the stock has broken its uptrend and it seems to be in the process of rolling over. Second, the relative strength has already broken one low, and is on its way to breaking its lowest low that was set back in April. If this is broken in the next week or two, it will confirm the downtrend and the possibility of continued lower prices.

In additon, earnings and sales are great for this company and the industry. Expectations are running high, so any disappointment or lack of phenominal surprise, will be disastrous for the stocks in this index.

One final note, the weakest part of the year is coming, August - October. Investors should be very cautious on what they buy, monitoring the markets and their stocks carefully, and honor thy stops religiously!!!

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