I know I have written several cautious commentaries about the overall market in recent months and nothing has changed for me to abandon those thoughts. There are a number of indicators that are flashing warning signs, but none of them are actually from the market itself. They are all secondary indicators like sentiment, consumer confidence, and so forth. Until we see actual bearish signs from the market, I believe there are still opportunities that investors need to explore.
One area of particular interest is the semiconductor industry. Several big-name chip companies have been getting hit with selling pressure in the last few months while a few others have been skyrocketing. Companies like Applied Materials (Nasdaq: AMAT), Intel (Nasdaq: INTC), and Micron (Nasdaq: MU) are in oversold territory based on the weekly stochastic readings.
In the case of Applied Materials, the 10-week RSI is in oversold territory as well and that hasn’t happened since October 2015. Intel’s stochastic readings haven’t been in oversold territory since July 2017 and Micron’s hadn’t been there since February ’16.
In the meantime, Advanced Micro Devices (Nasdaq: AMD) and Qualcomm (Nasdaq: QCOM) have jumped in recent months. AMD is up almost 90% in the last two months and Qualcomm is up over 25%.
When earnings season started, I wrote an article on Seeking Alpha about a number of semiconductor stocks as there was a week where there were seven companies reporting earnings. I put together the following table for that article.
What I found to be most interesting was how the lowest rated stocks, in terms of the EPS ratings, SMR ratings, and analysts’ ratings, have gained ground since July 24 while the other four have lost ground since then.
How do you explain this? As far as the analysts’ ratings, it doesn’t surprise me to see the lowest rated stocks outperforming the others. Analysts’ ratings are a sentiment indicator that I use often and I view them from a contrarian perspective. If analysts are somewhat uniform with a neutral to bearish opinion on a stock, it leaves room for upgrades and that can spur a rally. Conversely, if the consensus opinion is a bullish one, there is little room for upgrades.
As for the EPS ratings and SMR ratings being low, I can’t explain that. That is not how those ratings are supposed to work. The highest rated stocks on a fundamental basis should outperform. Trust me, I have run correlation studies on these two indicators and there is definitely a relationship between them and the price performance of the stocks.
I put together the chart below to show how these seven stocks have performed since July 24. As you can see, AMD, Qualcomm, and Xilinx are in positive territory while the other four are in negative territory.
Another interesting point is that Lam Research (Nasdaq: LRCX) and Intel are both down over 10% since then and they are the two highest rated stocks by the analysts. This goes to support the previous argument for using the overall analysts’ ratings as a contrarian tool.
With that being said, I also believe the current circumstances surrounding Texas Instruments (Nasdaq: TXN), Maxim Integrated (Nasdaq: MXIM), Intel, Lam Research, and Micron are presenting buying opportunities for investors.
The stocks are still among the best performers out there when it comes to the EPS ratings and the SMR ratings. These tools from Investor’s Business Daily rate the companies’ earnings and sales growth along with their profitability measures. Companies that are growing earnings and sales faster than the rest of the market will see support come in and investors will start buying them again.
I look for a number of the oversold stocks to reverse course in the coming weeks and will likely be considerably higher by the end of the year. I would keep an eye on the overall market though, because if we start seeing bearish signals from the overall market, these stocks will fall with the rest of the market.