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Wednesday, October 24, 2007

Despite drop in semiconductors, tech rally still has legs

The Philadelphia Semiconductor Index ($SOX) plunged today. Is this the end for the tech rally?

In the chart below, I compared the Merrill Lynch HOLDRs that are focused on technology. The ETFs and their associated sectors are as follows:

SMH - semiconductors
SWH - software
IAH - hardware
BDH - networking
HHH - Internet
IIH - Internet infrastructure

Tech HOLDRs compared
As can be seen, the Software HOLDR (SMH, black line) is indeed breaking down. Notice, however, that the other ETFs are moving up or at least holding their own. Interestingly, the Internet HOLDR (HHH, light blue line) does show weakness despite all the hoopla over Google and Yahoo's good earnings reports recently. Still, for the most part, the other tech sectors are still showing growth.

Looking closer at the semiconductor sector, we have had some earnings reports that were good, some that were lackluster. Similarly, forward guidance has varied from company to company. Nevertheless, market research companies like iSuppli are predicting 11% growth in the sector in 2008. It could be that investors are over-reacting to a limited set of disappointing results.

In looking at the charts of individual tech sector ETFs, it appears there is still strength in the majority of them. Based on this, I think it is safe to say that the overall technology sector will not follow the semiconductor sector down. Tech will remain an area of strength.

Disclosure: author owns no shares in SMH, SWH, IAH, BDH, HHH, IIH

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