Zarlink poised to dodge tech supply crunch

The Stock

Zarlink Semiconductor Inc.

Recent price: $2.06

The Trend

Heightened market volatility puts even the most bullish investor on edge. The CBOE Volatility Index shot up almost 25 per cent last week, signalling rising premiums in the options market. The technology sector seems especially vulnerable, with many big cap names dropping below trend in the wake of the Japanese disaster that has threatened global tech supply chains.

The S&P Technology Index, Nasdaq 100 Index, and the Philadelphia SOXX Index have all turned Stock Trends Weak Bullish, an indicator of the drop below trend, after the market digested the implications of possible manufacturing disruptions in Asia. This column advised a buy for the sector - the iShares Philadelphia SOX Semiconductor ETF on its Stock Trends Bullish trend signal in November - but with the group's retreat that trade is now testing market timing investors to pull the plug. However, other investors may see opportunity in the slide and buy on price weakness.

The Trade

Ottawa-based Zarlink Semiconductor is a small-cap play that need not be lumped in with the supply issues afflicting major global semiconductor names. The stocks of Zarlink's competitors in the network communications space, such as PMC-Sierra, Integrated Device, and Silicon Laboratories, took a bigger hit in the past two weeks.

Zarlink's shares have been holding near the established long-term trend line. A consolidation of the share price at this level, while the sector battles volatility, may serve up a near-term rally when the market cloud dissipates. A long bet on this semiconductor would go well with a sector rebound. Investors will be watching how Zarlink builds upon improved fundamentals presented in the previous quarter as the company nears its 2011 fiscal year end at the end of March.

The Upside

Expectations here should not be too great. Technical share price objectives range anywhere between $2.25, where near-term resistance is encountered, and the $2.50 level that the shares maintained before the stock's bear trend of 2007 took hold.

The Downside

Should the share price retreat below $1.90, where Zarlink would be labelled as Stock Trends Weak Bullish, this trade will have proved disappointing. Anticipate the stock to remain above the long-term, 40-week average price of $1.99.