Rebound in Chip Stocks Sparks 2.8% Nasdaq Gain

A strong rally in the Nasdaq composite index dominated investors’ attention Thursday, but technical analysts who keep their eyes peeled to stock charts were preoccupied with semiconductor shares.

Nasdaq overcame a 3.7% plunge early in the day to finish up 101.42 points, or 2.8%, at 3,759.88 in heavy trading, and it did so in part thanks to a sharp recovery in semiconductor issues.

The popular SOX semiconductor index sank 7.7% early in the day, then rebounded to recoup nearly all of the loss. It finished off just 0.4% at 950.59--still the lowest since late May.

In the broad market more stocks declined than rose. The Dow industrials edged up 19.05 points, or 0.2%, to 10,706.58.

Analysts searching for clues as to Nasdaq’s next move--after its sharp recent decline--are looking to semiconductor stocks.

The chip stocks had been the strongest sector of technology this year, and led Nasdaq’s recovery from its late-May lows.

But since mid-July the SOX index has been in retreat, amid rising worries over how long the current boom in demand for chips can last.

On Thursday Kulicke & Soffa (ticker symbol: KLIC), a maker of semiconductor assembly equipment, led the chip sector lower after it warned that some customers are deferring orders, which could hurt second-half earnings.

Kulicke shares dived $5.50 to $16.63, even though it said the order deferrals were a response to parts shortages affecting certain customers.

The SOX index, which includes such chip makers as Motorola and Advanced Micro Devices, as well as semiconductor-manufacturing-equipment makers such as Applied Materials, has slumped 25% since July 17. Nasdaq has fallen 12% in the same period.

If the SOX index were to crumble further, Nasdaq itself would almost certainly take a nasty hit, market technicians say.

Ominously, for the first time since November 1998 the SOX index’s value Thursday sank below its 200-day “moving average,” a key indicator watched by traders and technicians.

Plotted on a chart, a moving average gives a sense of a stock or index’s recent trend, with the hills and valleys smoothed out. It’s considered bullish when the index itself, plotted on the same chart, stays above the moving average.

Though the SOX climbed back to close slightly above its moving-average Thursday, the intraday drop below the average is a cause for concern, some market technicians say.

Indeed, they note that the SOX had stayed comfortably above its 200-day average line throughout the entire March-May tech sell-off.

If the SOX can’t hold above the moving average in coming days, it could signal a renewed sell-off across the tech sector, some analysts say.

“If we break below this range, the next logical point [for Nasdaq] is the May low,” said Michael Kahn, chief technical analyst at BridgeNews. Nasdaq bottomed at 3,164 on May 23. It’s still 19% above that low.

Equally troubling to some analysts is that, despite Nasdaq’s rebound Thursday, no other tech sector has emerged to pick up the slack left by chip stocks, said Todd Gold, a technical analyst at Gruntal & Co. in New York.

“It’s basically a search for leadership at this point,” he said.

However, Gold doubts Nasdaq will fall to its May trough.

As for what sparked the tech sector’s turnaround Thursday, some traders pointed to a rebound in Cisco Systems shares. They climbed $3.44 to $64.38 as several analysts said worries about the company’s upcoming earnings report are unfounded.

Still, analysts said some investors were on edge ahead of today’s government report on July employment trends. A strong report could raise the likelihood that the Federal Reserve will tighten credit again when it meets Aug. 22.

The bond market, however, ended mostly flat Thursday, despite the looming jobs data.

Among Thursday’s highlights:

* Major tech stocks ending higher included Intel, up $1.81 to $65.06 after falling to $60.44; Sun Microsystems, up $6.44 to $107.69; Gateway, up $3.13 to $55.63; and Oracle, up $4.31 to $77.44.

But Applied Materials ended down $3.56 at $69 and Cypress Semiconductor fell $3 to $33, though it rose from an intraday low of $30.38.

* Many telecom stocks were under pressure, though they too closed off their lows. Nokia fell $1 to $41. Equipment maker ADC Telecom fell as low as $33, then rebounded to end up $2.81 at $42.

* Many buyers turned to old-economy stocks, including utilities and banks. The Dow utility index rose 1.4% to a record high. Among bank issues, Wells Fargo gained $2.50 to $43.94 and Bank One rose $1.50 to $34.50.

* Some retailers also revived, including Abercrombie & Fitch, up $2.94 to $18.88, and Ann Taylor, up $4.19 to $32.50. But Gap slid $1.75 to $30.38 after its earnings warning.

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Market Roundup: C5-6