Of course, there are arguments as to why China should or should not bow to U.S. demands, and the inv...
Avoid These 2 High-Yield Tech Giants
09/25/2012 11:15 am EST
Just because these companies' dividends appear healthy, it doesn't mean that the stocks are good buys, writes MoneyShow's Tom Aspray.
Stocks have continued to correct from the post-Fed highs, but so far there have been no signs of heavy selling.
Overnight action in the markets has been quiet in spite of more negative news out of the Eurozone. Business confidence in Germany declined for the fifth month in a row. Germany has the fourth-largest economy in the world.
Buyers are clearly a bit nervous with the major averages at current levels. Given September’s historical pattern in election years, a cautious approach is warranted. Still, many underinvested investors are anxious to get in the market, and many seem too focused on the dividends.
As I pointed out earlier this month in “3 High-Yield Disasters," some of this year’s recommended high-yield plays have been disasters.
These two tech giants are still being recommended because they offer attractive dividends. Some analysts are even expecting them to increase their payouts. However, a close examination of the weekly and daily charts will hopefully show income investors why they should stay out of these two stocks for now.
Chart Analysis: Intel (INTC) is probably the most well-known semiconductor company. Since the May high of $29.27, it is down over 22%. It currently yields 3.95%.
- The weekly Starc- band was tested last week, with the long-term trend line support (line a) in the $22 to $20.75 area.
- As INTC started to rally in July, the weekly relative performance or RS analysis started to deteriorate. It decisively broke support (line b) by the end of the month.
- The relative performance has continued to plunge, as INTC has been much weaker than the S&P 500.
- The weekly OBV, after moving slightly above its WMA, reversed to the downside in late August and still looks weak
- Volume was heavy last week, and the OBV is getting closer to long-term support (line c).
The daily chart of Intel (INTC) shows that the potential double-bottom formation (line e) was decisively broken at the end of August. Prices have since accelerated to the downside.
- The longer-term support (line f) that goes back to the highs from 2011 has also now been broken.
- The daily relative performance violated its support a few days ahead of prices, and made further new lows on Monday.
- The daily on-balance volume (OBV) held up better than the weekly OBV in August, but then violated its uptrend (line h) before prices broke support.
- The OBV has now plunged to new lows for the year, and continues to look weak.
- There is initial resistance now at $23.50, with further levels in the $24.50 area.
NEXT: Which Other Well-Known Tech Name Should You Avoid?|pagebreak|
Dell (DELL) has also had a rough year, as it is down 41% from the February high of $18.36. It currently yields 3.1%, and once again is approaching the weekly Starc- band.
- In May, DELL plunged and closed below the weekly Starc- band. As is often the case, DELL then moved sideways for almost three months before the decline resumed.
- The violation of the weekly support (line a) has downside targets in the $8 area.
- The relative performance made lower highs in early 2012, and broke support (line b) in April.
- The weekly OBV shows a more pronounced negative divergence (line c), and made another new low last week.
- The weekly resistance is strong in the $12.50 area.
The daily chart of Dell (DELL) shows the impressive rally in January and February but the gap lower opening on February 22nd was the first warning sign as volume was the heaviest since October.
- The relative performance did not confirm the February highs (line e). It then dropped sharply below its WMA.
- The daily OBV did confirm the highs, and did not break key support (line g) until May 16.
- DELL dropped 17% on May 22, as it gapped sharply lower on another disappointing earnings report. Volume was a staggering 109 million shares.
- Another wave of heavy selling hit in August, and the daily OBV continues to make new lows.
- The daily chart has initial resistance in the $10.70 area and the declining 20-day EMA.
What it Means: Though these two stocks are clearly oversold, and are likely to eventually bottom out, it is way too early to buy. I hope this analysis will stress why income investors should not only analyze the quality and safety of a stock’s dividend, but also its technical outlook.
I also advocate that income investors use stops on their positions, even though many income investing experts may disagree. I think it is an important part of a disciplined approach, as determining the stop before you buy makes it much easier if the position goes against you.
How to Profit: No recommendation for either of these stocks.
The weak relative performance of INTC was instrumental in my recommendation to sell half the position in late July at $25.68, just above the entry price of $25.44. The stop was raised to $24.73 on the remaining position, and we were stopped out on August 24.
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