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Thursday, June 24, 2010

May Durable Goods -- Tech wavers but the trend is still up

The Advanced Report on Durable Goods for May was released today and it didn't do much to keep the market from continuing its single-minded decline.

The headline number for May was not what investors were looking for (New Orders decreased 1.1%) but many analysts pointed out that ex-transportation, the overall number for new orders actually increased 0.9%.

As I always do, I will focus on the tech sector. The numbers were mixed but, with one exception, not bad at all.

Shipments --

Many analysts give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. In other words, ancient history. The following chart shows how May shipments look for the overall tech sector:

The chart shows a downturn in May but so far it just looks like a repetition of an ongoing pattern: big jump up followed by two months of small declines leading to a solid up-trend. So far, there is no reason to be alarmed. 

New Orders --

The forward looking measure that Wall Street gives the most credence to is the New Orders number. The following chart shows New Orders for the tech sector:

The chart shows May's New Orders barely showing any improvement. The next two charts show why.

The first of these two charts shows the category of Computers and Related Products. New Orders increased 2.5% in May.

 So far, so good. The second of these two charts shows where the problem lies. This last chart shows New Orders for Communications Equipment.

Here we see a chart that is in an unrelenting down-trend. The result is that the underperformance of Communication Equipment category is beginning to impact the rest of the tech sector. Looking at the value of new orders (left axis), this category appears to be roughly 20% of the overall tech sector.

Conclusion --

Tech is showing some slowdown but so far there are no signs that the up-trend currently in place has actually come to an end. With the market the way it is these days, however, it is hard to advise buying tech or anything else. Still, if the up-trend in orders and shipments continues, the current period will surely end up looking like a great buying opportunity. Are you brave enough to take that opportunity?

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