The S&P Information Technology index has had a tough time during the past two months, down 5.0% since mid-February despite a 2.7% gain by the S&P 500 index. Where does it go from here?
Underperformance by the sector in February and March was not a surprise. Favourable seasonal influences starting in the first week in October usually peak in January after the annual Las Vegas Consumer Electronics show has concluded and following the release of first-quarter earnings reports.
Traders take profits on news. Thereafter, the sector has a history of underperforming the S&P 500 until mid-April. The sector has a second brief period of seasonal strength from mid April to the end of May. The average gain per period during the past 20 years was 6.4%. Seasonal strength during the latter period coincides with the release of hot new consumer electronic products that were initially announced at the CES.
Prospects for the mid-April to end of May period this year are above average thanks to the launch of a series of new consumer products goods.
Apple Inc. has just launched iPad 2. Research in Motion Ltd. plans to launch its PlayBook on April 19. Motorola Mobility Holdings Inc. recently released the Xoom tablet, which is anticipated to be the greatest competition against Apple’s dominance. Google Inc. and related companies also are scheduled to launch a series of new products and services. North American telecom companies are ramping up major marketing programs to launch these products. The tablet generation is upon us and consumers are seeking to replace laptop computers for more convenient mobile devices.
In addition, look for encouraging corporate news from the sector. Technology companies are flush with cash and it’s burning a hole in their pocket. Investors want to know how the cash is to be used. Perhaps a clue will be offered at annual meetings held during the mid-April to end of May period.
Possible uses of cash include dividend increases, stock buy backs and acquisitions. Last week Texas Instruments Inc. (TXN/NYSE) chose the acquisition route by investing US$6.5-billion of its cash into National Semiconductor Corp. News of the friendly takeover had an immediate and positive impact on the technology sector. The deal to take over National Semiconductor at a 78% premium implies that stocks in the sector are undervalued and prone to a takeover at the right price.
On the charts, the S&P Information Technology Index at 414 has an improving technical profile. It finally is showing early signs of stabilizing relative to the S&P 500 Index. The intermediate trend is up. The index trades above its 200-day moving average, but recently found resistance at its 50 day moving average at 423. Support is at 394. Resistance is at 440. The preferred strategy is to accumulate favoured equities and exchange- traded funds in the sector on weakness closer to support for a possible seasonal trade to the end of May.
Investment choices in the sector are substantial. The easiest way to own the sector is with broadly based exchange-traded funds. The best known ETFs that track the sector are Technology SPDRs (XLK/NYSE) and PowerShares QQQ Trust (QQQ/NASDAQ). The latter is approximately 64% invested in the technology sector.
Choices in Canada also are available. A word of caution on Canada’s top technology ETF: The S&P/TSX Capped Information Technology Index ETF (XIT/TSX) holds only five securities and is highly concentrated in three stocks: CGI Group Inc. (GIB.A/TSX), Open Text Corp. (OTC/TSX) and Research in Motion.
Financial Post
— Don and Jon Vialoux are authors of free daily reports on equity markets, sectors, commodities and exchange-traded funds. They also are research analysts for JovInvestment Management Inc. Reports are available at TimingTheMarket.ca and EquityClock.com. Follow them on Twitter@EquityClock.
Underperformance by the sector in February and March was not a surprise. Favourable seasonal influences starting in the first week in October usually peak in January after the annual Las Vegas Consumer Electronics show has concluded and following the release of first-quarter earnings reports.
Traders take profits on news. Thereafter, the sector has a history of underperforming the S&P 500 until mid-April. The sector has a second brief period of seasonal strength from mid April to the end of May. The average gain per period during the past 20 years was 6.4%. Seasonal strength during the latter period coincides with the release of hot new consumer electronic products that were initially announced at the CES.
Prospects for the mid-April to end of May period this year are above average thanks to the launch of a series of new consumer products goods.
Apple Inc. has just launched iPad 2. Research in Motion Ltd. plans to launch its PlayBook on April 19. Motorola Mobility Holdings Inc. recently released the Xoom tablet, which is anticipated to be the greatest competition against Apple’s dominance. Google Inc. and related companies also are scheduled to launch a series of new products and services. North American telecom companies are ramping up major marketing programs to launch these products. The tablet generation is upon us and consumers are seeking to replace laptop computers for more convenient mobile devices.
In addition, look for encouraging corporate news from the sector. Technology companies are flush with cash and it’s burning a hole in their pocket. Investors want to know how the cash is to be used. Perhaps a clue will be offered at annual meetings held during the mid-April to end of May period.
Possible uses of cash include dividend increases, stock buy backs and acquisitions. Last week Texas Instruments Inc. (TXN/NYSE) chose the acquisition route by investing US$6.5-billion of its cash into National Semiconductor Corp. News of the friendly takeover had an immediate and positive impact on the technology sector. The deal to take over National Semiconductor at a 78% premium implies that stocks in the sector are undervalued and prone to a takeover at the right price.
On the charts, the S&P Information Technology Index at 414 has an improving technical profile. It finally is showing early signs of stabilizing relative to the S&P 500 Index. The intermediate trend is up. The index trades above its 200-day moving average, but recently found resistance at its 50 day moving average at 423. Support is at 394. Resistance is at 440. The preferred strategy is to accumulate favoured equities and exchange- traded funds in the sector on weakness closer to support for a possible seasonal trade to the end of May.
Investment choices in the sector are substantial. The easiest way to own the sector is with broadly based exchange-traded funds. The best known ETFs that track the sector are Technology SPDRs (XLK/NYSE) and PowerShares QQQ Trust (QQQ/NASDAQ). The latter is approximately 64% invested in the technology sector.
Choices in Canada also are available. A word of caution on Canada’s top technology ETF: The S&P/TSX Capped Information Technology Index ETF (XIT/TSX) holds only five securities and is highly concentrated in three stocks: CGI Group Inc. (GIB.A/TSX), Open Text Corp. (OTC/TSX) and Research in Motion.
Financial Post
— Don and Jon Vialoux are authors of free daily reports on equity markets, sectors, commodities and exchange-traded funds. They also are research analysts for JovInvestment Management Inc. Reports are available at TimingTheMarket.ca and EquityClock.com. Follow them on Twitter@EquityClock.
