My guide to how to worry: Know what to worry about and when if you don’t want to get spooked out of a rally–or get killed in a correction

(Originally posted on October 14 but several readers have asked me to repost.)

What me worry?

On a day when the Dow Jones Industrial Average closes above 10,000 for the first time in a year and when the Standard & Poor’s 500 stock index closes within kissing distance of 1100 at 1092 ?

Of course.

When the market is rallying and everyone is getting kind of giddy, it’s exactly when you should be worrying. You don’t want to head for the exits just because an index has crossed some arbitrary number. That’s silly. But you would like to know what the chances are that something will go wrong.

How bad it might be if something did go wrong.

And when. Don’t forget the “when.” Deciding to sell because you’re worried that something bad is set to happen in 12 months is a guaranteed way to leave a big chunk of change on the table.

So what are my worries and what timetable are they running on?

Buy Taiwan Semiconductor (TSM)

Sure you want a piece of the technology action. Who wouldn’t after Apple (AAPL) broke to an all-time high after the company announced earnings on October 19. But isn’t everything priced out of reach? After all, we’re not exactly in the early stages of this rally.

I’ve found one late stage tech stock, though, that’s still cheap and that has, in my opinion, lots of potential.

Intel’s earnings should be enough to keep the technology rally rolling

After the market close on October 13, Intel (INTC) reported earnings that beat Wall Street estimates and–this is what’s really important this quarter if the rally is to keep going–raised its guidance for fourth quarter revenue to a top of the range $10.5 billion. That’s a full $1 billion above Wall Street estimates.

That set the stock soaring by almost 7% in after-hours trading. The entire chip sector moved up on the news.

The technology-heavy NASDAQ Composite Index is up 36% in 2009, outstripping the performance of the Standard & Poor’s 500 and the Dow Jones Industrial Average by two to one. This news should keep that out performance going.

Two other technology bellwethers Google (GOOG) and IBM (IBM) report on October 15.  Texas Instruments (TXN) reports on October 19 and Microsoft (MSFT) on October 23.

Intel actually went so far as to contradict the consensus view that the personal computer industry wouldn’t grow in 2009.

Tech stocks to lead earnings season again?

It’s early yet in earnings season, but I were a gambling man, I’d give the technology sector odds on leading the stock market again this quarter.

Wall Street is beating the bushes for earnings growth right now. If earnings don’t go up in the next quarter or two, stocks won’t be able to continue the rally that began in March.

Anbd where’s the growth going to come from? Financials are kind of iffy. Bank accounting is going to be an unprdictable mess this quarter what with write ups for rallies in toxic assets, and write downs for the rising price of banks’ own debt (yes, that counts as a loss for accounting purposes), commercial real estate loans and credit card debt.

Commodities and materials stocks will do well if the dollar keeps stumbling and if China looks like its still buying, but these cyclicals are starting to seem pricy.

Nope, for good ol’ fashioned earnings power right now, it’s hard to beat technology stocks.

And Wall Street analysts are determined that investors won’t forget it.

On Friday, October 9, Barclays upgraded IBM (IBM) as part of an upgrade of the whole computer hardwar sector. IBM climbed almost 3% on the day and Hewlet-Packard (HPQ) moved up 2%. Inel (INTC) and fellow chip-maker Texas Instruments (TXN) rose 1.5% and 5%, respectively.

Even Qualcomm (QCOM), which has lagged the sector,climbed 0.6%.

Credit Suisse boosted its target price for Google (GOOG) and that stock inched ahead 0.4%. Maybe it’s harder to move a $500 a share stock or maybe investors rightly see Google as company driven by consumer spending and advertising and they still have doubts about the consumer’s willingness to spend.

(Full disclosure: I own shares of Qualcomm.

Now, the chip wars get nasty; expect the survivors to go after the solar cell makers

Chip makers are packing more circuits onto their chips. The next generation will be dense with circuits just 28 billionths of a meter–28 nanometers–wide.

That will expand, yet again, the power and speed of semiconductors, and increase yet again the number of places where chips can be used. The smaller and more powerful chips will wind up adding smarts to yet more “dumb” devices and making already smart devices from cell phones to refrigerators to cars even smarter.

For the chip industry as a whole that means, once the current recession is over, more chip sales, more chip revenues, and more chip profits.

There’s just one tiny problem. Because the factories that make this generation of chips cost so much–a new 28-nanometer chip factory (called a foundry) now being built in upstate New York will cost $4.2 billion–almost no company can afford to build one.

Intel (INTC) figures that only chip companies with at least $9 billion in revenue will be able to afford the next generation of factories. That’s a very short list: Intel, of course, Samsung, Toshiba, Texas Instruments (TXN), and STMicroelectronics (STM).  Add in chip Taiwan Semiconductor Manufacturing (TSM), a contract foundary that makes chips for companies without factories. That’s the total: 6 companies in the world.

The drop to six, if Intel’s forecast is correct, just continues a decades long winnowing process that has reduced the number of serious players from 14 when circuits were 90 nanometers wide to nine at the current 45 nanometer levels. Only Intel and Samsung have firm plans to build 22 nanometer factories, the next step downward in size from 28 nanometers.

You can expect the remaining players in the semiconductor game of musical chairs to fight like a passel of six-year olds for each remaining seat. That battle will define winners and losers in the chip sector, of course, but it will also shake up sectors as diverse as solar energy and automobiles.