Slower-Growth Fears Again Clip Tech Stocks
Semiconductor stocks plunged Tuesday in another emotional selloff rooted in concerns that demand for high-technology equipment--a crucial element of the U.S. economy’s expansion--may be ebbing.
In the latest downward leg of technology stocks’ roller coaster of recent months, the tech-heavy Nasdaq composite share index dove 18.24 points, or 1.7%, to 1,043.90, a slide equivalent to nearly 82 points on the blue-chip Dow Jones industrial average.
The Dow itself also eased Tuesday, losing 16.98 points to 4,797.03.
The tech stock selloff was fueled by computer chip maker Cirrus Logic’s announcement that its sales and earnings for the current quarter will be lower than expected because a “major customer”--unnamed, but rumored to be Intel--decided to reduce orders for certain types of graphics and audio chips for personal computers.
Although Cirrus forecast that its operating earnings will be just 10% to 15% below results for the quarter ended Sept. 30, investors saw a much greater potential problem: that weakening demand for chips signals an end to the computer sales boom that has captivated Wall Street this year and helped bolster the economy.
Those fears were compounded Tuesday as influential technology analysts at Merrill Lynch & Co. and at SoundView Financial downgraded their ratings on key stocks, citing a strong possibility that demand for chips and other electronic components no longer is sharply outpacing supply.
“We are watching for changes in the semiconductor market as warning signs appear that shortages are giving way to oversupply,” Merrill Lynch analyst Thomas Kurlak said.
On Wall Street, that was all some skittish investors needed to hear. Cirrus shares plummeted $12.75 to $28, a 31% one-day decline for a stock that not long ago was at $61.125. Other issues falling sharply included Intel, down $4.44 to $66.375; Microsoft, down $4.375 to $93, and Dell Computer, off $3.125 to $45.125.
Although tech stocks have always been volatile, the price swings of the past few months have been exceptionally wild, following what was nearly a straight-up ascent for many of the shares in the first seven months of the year.
Micron Technology, a leading maker of computer memory chips, rocketed from $22 at the start of the year to a peak of $94.75 on Sept. 12. But since then Micron has been the car leading the tech roller coaster: The shares dove as low as $73 on Sept. 27, quickly rebounded to $82, fell again to $60 by Oct. 10, then rose above $74 on Oct. 24 before resuming their slide last week. On Tuesday, Micron sank $3.375 to $61.125.
Some veteran Wall Street analysts point out that such periods of manic gyrations are more likely to signal an end to a stock group’s advance than a new liftoff.
“This kind of volatility is more typical of a [stock’s] top than a bottom,” concedes Jerry Appel, analyst at Systems & Forecasts in Great Neck, N.Y.
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And because tech stocks have led the great bull market of 1995, the growing fear is that if technology cracks, so too will the broad market. Given the huge technology holdings of stock mutual funds, “if the tech group goes, the gains in the mutual funds are going to go too,” Appel said.
But many analysts aren’t yet ready to label tech stocks’ slide anything more than a classic “correction,” or temporary pullback, in a bull market. While a broad-market correction would be expected to clip 10% to 15% off major stock indexes, tech stocks’ corrections are naturally more violent because the stocks typically move faster than other stocks, on the way up and the way down.
Tech stock fans on Tuesday insisted that the latest selloff is a mere continuation of the correction that began in the group in midsummer. Despite Cirrus Logic’s announcement, tech bulls say that computer demand in general and semiconductor demand in particular aren’t going to fall off a cliff.
The bulls still see strong earnings growth for many tech companies in 1996, pointing out that the economy overall is expected to pick up speed next year. And on the supply side, most of the factories being built to meet future computer chip demand won’t even open before 1997.
Nonetheless, the fundamentals of the computer business are at the very least growing murkier. And without the ability to know precisely what tech companies’ earnings will look like in 1996, some investors are increasingly suspicious that the market action in the stocks is foretelling earnings troubles.
The stock market, after all, is supposed to look ahead, and its accuracy in predicting deteriorating fundamentals is often uncanny.
For market “technicians”--analysts who follow stocks’ chart patterns--the old saying is that “in price there is knowledge,” notes Alan Shaw, technical analyst at Smith Barney in New York.
Thus, analysts like Shaw are watching key tech stocks now for signs that the dramatic swings of the last few months might give way to an even deeper plunge.
Richard McCabe, technical analyst at Merrill Lynch, notes that one old rule of thumb for chart watchers is that high-flying stocks can fall about 33% from their peak, then rebound and set up for another decline to complete the corrective process.
But if a stock blows through that one-third decline, it may easily go on to fall as much as 50%, McCabe says.
Micron Technology fell 31% between Sept. 12 and Oct. 9 before rebounding. At $61.125 now, the stock is down 35% from its peak. If it fails to hold at these levels, that could signal a much deeper slide ahead, analysts say.
“The odds are greater now than at any time up to this point that a more severe corrective phase is going to take place” for tech issues, Shaw says.
But would a further fall in Micron and other tech stocks necessarily have to pull the entire market down significantly?
McCabe doesn’t think so, despite many investors’ jitters. He points out that the bull market since 1990 has seen many stock groups move from being leaders to being laggards without destroying the broad market’s upward momentum for very long. Investors have simply rotated into other stocks.
The two-year-long plunge in drug stocks that began in January, 1992, for example, was devastating for those shares but did not interrupt the bull market.
At most, McCabe thinks, the Dow industrials and broader stock indexes could fall between 5% and 10% from their peaks between now and year’s end if technology stocks weaken further.
Some Wall Streeters argue that because technology shares have found their way into so many portfolios, their decline could be much more troubling for the market.
But McCabe also points out that the stunning gains in key tech stocks early this year didn’t allow many investors to get in at lower prices. He believes that those investors could be lining up to buy the tech shares if they stumble much lower, preventing the kind of meltdown that the bears are betting on.
* RECORD LOW: Mexican peso slips amid continued pessimism on economy. D3
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The Leader Cracks?
After rising almost without interruption in the first half of this year, semiconductor stocks have turned extremely choppy in recent months--raising fears that they have peaked. Philadelphia Stock Exchange semiconductor index, weekly closes except latest:
Tuesday: 240.69
Source: Bloomberg Business News
