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Stock Watch List - ALDA, SMH

(September 16, 2004)

Again, readers are encouraged to exchange ideas and views on both our individual “stock picks” and our market commentaries.  Please start posting in our Discussion Forum today!

ALDA
In today’s stock commentary, I would like to discuss a stock I pointed out to my readers in my August 19th commentary – Aldila, Inc. (ALDA). Today, the stock slid below its 50-day moving average before finally staging a partial recovery towards the end of the day – with the stock price sitting right at the 50 DMA at the close:

Aldila, Inc. (ALDA) - Stock sitting right at the 50 DMA at the close!

Technically, this stock has not broken down yet, although it has to bounce soon if it is to resume its uptrend which dates back to June and July of last year.  Today’s news was again triggered by an earnings warning from Callaway (ELY), which is a major customer of ALDA.  Again, I believe that this is an overreaction.  The last time that Callaway warned on earnings, ALDA reported record earnings six weeks afterwards.  It is also interesting to note from my August 19th commentary that “the tough competition that is cutting into the high-margin woods business of Callaway is mainly coming from TaylorMade, which is another one of ALDA’s significant customers.”

For now, my bullish position on this stock still stands.  There is really no clear sell signal unless the stock decisively closes below its 50 DMA.  In fact, we are now sitting right at a historical resistance/support level – a level which should provide a good entry point for adventurous traders – provided that one sets a stop loss level slightly below the 50 DMA (on a closing basis since the stock is so volatile and illiquid).

SMH
In last Sunday’s market commentary, I discussed the potential bottoming of relative strength in the SOX vs. the S&P 500 and its bullish implications – with a further discussion on the past bull cycles in the SOX during the 1994 to 2000 and the October 2002 to November 2003 periods.  In that commentary, I conjectured that based on the past extent in prior corrections of the SOX (both in time and in the severity of the correction of relative strength), we may be near a bottom in the SOX – with a potential bull cycle emerging and maturing during the next 12 to 13 months.  Given my bullish stance on the stock market and the fact that the SOX has led the market on virtually all rallies and declines for the last ten years, I still stand by this analysis.  In fact, the SOX has made some headway during the last week, although it has lately encountered some resistance at the 50 DMA, namely today:

Semiconductor Index - Philadelphia (SOX) - The SOX - rejected at the 50 DMA although it has cleared its prior peak at 394.58.

Given that the market is currently experiencing a minor correction from a ST overbought condition, it is most likely that the SOX will not be able to clear the 50 DMA at this time.  Most likely, there will be more consolidation at around the 370 to 380 level.  At some point in the next couple of weeks, however, there will need to be a breaking of that resistance, if my thesis is to hold true.  At that point, readers may want to buy some SMH -- the semiconductor HOLDR that is traded on the American Exchange.  Please stay tuned.

Happy Trading/Investing!

Henry To, CFA

P.S. Please discuss this stock in our individual stocks discussion forum.

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