No Man's Land

It might be brief. Even if it is brief it might be worth playing if you are sitting in front of a computer screen watching every tick of the market. Then again, it might bigger than most people expect. It is the latter scenario that makes one think about placing some money into the big name semiconductor and semiconductor equipment stocks. Have we reached a turning point?

In my view, the current rally looks pretty non-committal. As I write this article early in the third week of August I see that hope has reappeared. The stock market is in the midst of a multi-day rally. Granted, not all stocks are rallying, but the most visible averages — the Dow Industrials, the S&P 500, the Nasdaq 100, and even the lowly Philadelphia Semiconductor Index — have bounced more than 20% off the lows of the year. Stocks are rallying right in the face of a persistent stream of bad news. They are rallying despite the fact that business conditions continue to deteriorate.

I have to remind myself that the market's job is to frustrate as many people as possible. Is this a new bull market or just a tease? At certain points, the rally looks like it has some conviction. But most of the time it looks like a bounce in a bear market. I think it is a tease, but I have been wrong before.

What weighs most heavily on my decision whether to play this rally or not is the fundamental front. In the semiconductor world, pricing power (meaning average selling price) has been weak and end demand, even though it has pushed unit volumes higher, is still a question mark. No one is really rushing to upgrade their corporate IT infrastructure. No one is dashing out to purchase the latest and fastest PC or the fanciest mobile phone. The reasons to race out and buy are simply not that compelling. There will be an upgrade cycle sometime in the future.

All year my view of the stock market has called for a short-term bottom in the late summer months, a bounce that sucks investors back in during the third quarter, and then another test of the lows late in the fourth quarter. The current rally might go further than most expect and it might be worth playing if you plan to be very nimble. Getting really bullish just because stocks are rallying is far too risky.

Yes, I know. Stock prices are more attractive than they have been in many, many years. But I can't fight the fact that business conditions have still not turned the corner. I like to have fundamentals support rising prices when I decide to become a buyer.

It's amusing to watch some of the folly. Lately, a twisted bit of irony has been wafting across the landscape. Most of the pundits that follow the chip business have turned decidedly negative. If recommendations are viewed in a contrary manner they should actually give investors some hope (maybe that's why stocks are rallying). Yes, finally turning negative, at least in the interim, is probably the right thing to do. But for most of this downturn, the pundits — namely the Wall Street crowd — have stood uniformly on the side of the bull. It has only been in the past few weeks that we have read and heard some very negative calls. Price targets and their industry outlooks have been slashed to a degree where they are finally coming in line with the reality of the world most of us have been dealing with for months.

No man's land is a tough place to be. There are too many cross-currents. Sticking a wet finger in the wind does not work when we are putting our hard-earned money on the line. I firmly believe that, when the industry and the macroeconomic environment turn, there will be plenty of time to get on board.