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Tech Industry

Will today's chip rally last?

Chip stocks lead the Nasdaq higher after weeks of steady declines, but analysts are unsure whether the gains will continue in the short term.

Chip stocks led the Nasdaq higher today after weeks of steady declines, but analysts are unsure whether the gains will continue in the short term.

Compared to the sluggishness in chip stocks during the past few weeks, today's performance was almost euphoric. The Philadelphia semiconductor index rose 73.50, or about 8 percent, to 1,027.19, the first time it closed above 1,000 since July 26.

Chip equipment maker Novellus led the index higher, gaining $7.06, or nearly 16 percent, to close at $51.44. Other makers of equipment used to create chips also posted large gains. Applied Materials climbed $5.63, or about 8 percent, to $74.81, and KLA-Tencor leaped $6.31, or 14 percent, to $51.

Chipmakers also joined in the party. Shares of Advanced Micro Devices jumped $5.25, or 9 percent, to $63, while Texas Instruments moved up $6.50, or 11 percent, to $63.75. Intel closed up $3.13, or almost 5 percent, at $66.94.

With today's gain, the Philadelphia semiconductor index has more than doubled from its 52-week low of 475.97, but it is well off its March 14 intra-day high of 1,362.10.

"It's hard to say if semiconductor stocks will see a sustained rally in the short term, but it's clear that they were oversold," said chip equipment analyst Brett Hodess of Merrill Lynch.

"Semiconductor stocks were expensive in February and March," said Chris Chaney, a chip analyst at A.G. Edwards. "The valuations were based on best-case scenarios in all parts of the sector."

Recent concerns about the sustainability of the high valuations led to a steady decline. The chip index closed at 1,266.39 on July 17 but fell about 27 percent by early August.

"All it takes is a little bit of news to bring these stocks down," Chaney said. Interest rate hikes, component shortages and warnings of slower sales growth from cell phone companies swirled together to wreak havoc with chip stocks.

"People were acting like cell phone chip sales were half the market, when they're only about 20 percent," Chaney said.

Hodess said that with the recent decline, semiconductor companies with market capitalizations of less than $1 billion fell to a price-to-earnings ratio of about 11 and a price-to-sales ratio of 1.7.

Even though some investors may have concluded that some shares were cheap, the analysts do not think today's bounce indicates that the sector is headed for the stratosphere anytime soon.

"You will see a sustained rally over the next few months, but it's more difficult to predict over the short term," Hodess said.

Increased demand from the holiday buying season, however, could provide a spark. "September and October tend to be the time when consumer product companies start buying a lot of chips," Chaney said.