We're Getting Close

The market is heading toward a bottom. From what I can tell, the stock market's bottom is lagging the industry's bottom. We may get another dip in the industry late this summer, but the data suggest that the lows for the industry are in. I seriously doubt if it will be a fancy, turn-the-corner-and-head-to-the-upside bottom, but we will bottom soon.

What does it take to form a bottom?

As I write this, the stock market continues to fall under relentless selling pressure. It appears to me as though the selling will take share prices down at least until the end of June, as portfolio managers purge their accounts of anything related to technology. Call it second-quarter window dressing if you like. What's been really interesting about this decline is that, as the big money cleans out anything related to technology, the small investor has been buying the dips all the way down — pinning his hopes for a rally on the bounce we have seen in semiconductor capital equipment bookings and billings, and on some of the improvement we have seen in the business of select chip companies.

Remember, "the market will do what frustrates the most."

I have had a lot of questions from individual investors about what to buy during this drop. My strategy has been to wait it out. Early this year we took some profits off the table. We booked gains in some of the largest front-end capital equipment issues, the photomask manufacturers and the subsystem component suppliers. I mentioned selling in this column. The rally off the October lows, which was driven by the recovery in the industry, was extrapolated into something bigger than it really was. What we have seen so far is a bounce in a long-term recovery pattern. It is going to take time for the end markets to get back in shape. Corporate IT budgets need to be rebuilt, and new IT projects have to have a measurable return on investment before they will be funded. The days of spending money like drunken sailors are over.

If you are really a long-term investor, then embrace the strategy of the little guy. He is right; the industry is recovering and we should be buying during periods of weakness. This is hard to do because it requires a tremendous amount of patience. Fighting the tape is an exercise in futility. Just about any chart of the popular averages or a technology stock will tell you that the trend is down. Do you see a bottom yet? I see a slow, convictionless, grinding trend. A trend that tells me we have to work through some of these financial and global dislocations before we see another strong upcycle.

If there is one thing about this drop in stock prices that has me encouraged, it is that valuations are starting to become much more compelling. I like to buy things that are cheaply valued. It's been quite a while since semiconductor and semiconductor equipment valuations were so reasonable. In all likelihood, they will get even more reasonable over the summer months.

Lately, I have been ending this column with some kind of comment about patience or caution. I wish I would not have to say that. I really wish we could just throw the gauntlet down and buy, but it still feels like there is downside risk. Unfortunately, I can't change my opinion at this time so I will end it by saying, "Keep the faith." There will be a recovery and there will be a rally. Keep some powder dry so you can participate in the next cycle. It's not too far away.