Another Collapse in Technology Stocks
by Tom Dyson
September 11, 2006
What a party we had in August.
August is a quiet time in the market. Volumes are light and news is thin. Earnings reports are put on hold for September and October and most traders and analysts go on vacation.
As a young bond accountant in London, I remember this time of year fondly... it was the only time of year I could get a seat on the subway!
There’s another aspect to August trading. It’s easier to push the market around. It reminds me of the golden age when big traders like Vanderbilt or Daniel Drew owned the markets. The market was shallow back then so they could play all sorts of games, like creating squeezes and starting bear campaigns. It was almost as if they were playing chess against each other.
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I mention this because today I received my September issue of The High Tech Strategist. Fred Hickey, the author, thinks the market was “goosed higher” in August 2006.
“With sparse data from companies and the next earnings warning period still a couple of weeks away, this ‘no news’ period has been filled with bullishly-slanted rumors and opportunistically-timed sell-side stock upgrades intended to give the market and individual stocks that final push to month end.”
Here are some examples, from Hickey’s research:
- On August 31, Intel completed a one week 10% rally. 42,000 call options traded that day, more than ten times the volume of put options. Intel doesn’t report until mid-October.
- On August 30, Lam Research jumped 7.3% on three times normal volume. No specific news could be found.
- An analyst from Caris upgraded SanDisk in early April. Those who bought in the days following the upgrade “watched in horror” as the stock plunged as much as 44% into July. The same analyst from Caris upgraded SanDisk again on August 24. The stock rose almost 20% in the week that followed.
“Other than analyst upgrades,” says Hickey, “there’s no significant news to account for this activity. [These stocks] all have one thing in common, however. They are all high-beta trading favorites of the wise guys.
“Throughout this month, I’ve had the strange feeling we’ve seen this all before,” he continues. “Turns out, we have...”
Hickey sees a market that is “eerily similar” to the market leading into September 2000. If you recall, there was a big tech party in August 2000, with semiconductor stocks like Intel making new all-time highs, bouncing back after the bust in March 2000. Then in September, tech stocks got wiped out. The Nasdaq dropped 17% in September 2000 and many of the fad stocks were cut in half.
Hickey sees the same thing happening again in September 2006. He’s very bearish on technology stocks right now, and given the nature of August’s rally, he thinks we have an excellent opportunity to bet on a big decline in technology stocks.
At this point, I could detail Hickey’s research to make his point. He studies component distribution, inventory build-ups, Taiwanese PC motherboard reports, and the latest shipment levels from Cisco. It’s all noted in his newsletter. But I’ll save you the time.
Let me state it like this: No one knows the technology sector like Hickey. He knows it inside out. He listens to all the conference calls, reads the trade magazines, and studies all the earnings reports. Oh yeah... he’s also been investing in and writing exclusively about technology stocks for the past three decades.
This is all you need to know:
“Over the past several days and weeks,” says Hickey, “I have built up my largest put option position probably since September 2000.”
Hickey is an astute investor. I know this for a fact because I always follow the performance of his recommendations after he makes them.
Today, we simply pass his message onto you. What you do with it is your own business. Personally, I don’t trade options. So I’m happy to watch the spectacle from the sidelines and wait for a buying opportunity.
