Digesting its latest overbought condition following a well received earnings season, tech continues to impress. While we continue to see some moderation on an equal weighted basis as you move down in capitalization, the sector’s broader trends remain firmly intact. With the S&P Technology sector up 37% year to date (versus the S&P 500 +15%), and its weighting in the index at its highest level since the peak in ’99, I have received a fair amount of questions on how long tech’s leadership can carry on. From a technical perspective, I have always used semis and small cap tech as a risk proxy for the sector, and while I admittedly don’t love that small cap tech still hasn’t reclaimed the relative high set back in June (we discussed this momentum divergence back in early August), absolute trends are sound. Semis on the other hand, buoyed by a steady stream of M&A, continue to act great. At some point, dips in the market will not be aggressively bought, and oversold conditions will not hold, but for now, the path of least resistance continues to point upward. You could even argue that the sector would benefit from a risk-off environment related to growth concerns, as investors are likely to rotate towards the secular growth, strong cash flows and bulletproof balance sheets that large cap tech has to offer. Oh and if the chart below was a stock, I’d likely say that from a technical perspective - “breaking out from a big base, it looks like the highs are in play.”
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Outside of semis ripping and reversing their relative divergence, little has changed from a trend perspective over the past month within the TMT space. Although we continue to see some moderation on an equal weighted basis, outside of communications equipment, tech continues to look solid, media not so much, and telecom even less so. Juniper (JNPR) has been a great example of the technical concerns I have had around comm equipment, and while the bigger picture trends remain worrisome, the oversold condition that developed following last week’s earnings preannouncement likely marks an interim low for the stock. Despite media’s struggles, Comcast (CMCSA) has been one of my favorites, and I have to admit that the past 6-weeks have not been kind to that bullish view. Oversold at longer-term support, failure of momentum to develop would be a victory for the bears and increase the likelihood of the stock seeing the low $30s.
Accelerating to yet another all-time high, large cap technology continues to possess one of the strongest trends in the market today (9/12). Unfortunately, the same cannot be said across the capitalization spectrum, where small and mid caps have been digesting a few of the cracks that we discussed in early August. While divergences can persist and admittedly are terrible timing tools, we find it somewhat suspicious that the riskier part of the sector has peeled off. Industry wise, two really standout, where software continues to exhibit strong relative momentum, while comm equipment’s corrosion persists. Whether positioned to break out from a longer-term base or acting particularly distributive on a multi-year basis, today’s report takes a look at 10-stocks that caught my eye within the tech sector.
Despite a fair amount of price volatility over the past 5-weeks, little has occurred to alter our view that technology is in the midst of a typical consolidation following a dramatically overbought condition. We’re constantly on the lookout for divergences, keeping a close eye on semis and small caps for a sign of growing risk aversion, something we have yet to definitively see. The one group that continues to trouble us happens to be Communications Equipment. Absolute trends are finally catching up to what relative strength has been sniffing out, with a growing list of names looking increasingly vulnerable as we head into earnings season.
Firmly within an uptrend, technology has been digesting both internal and external overbought conditions. It’s too early to say whether the violent intraday reversal from a couple of weeks ago is the start of a bigger problem for the sector, but we’ll be keeping a close eye on a few indicators that have served us well historically, semis and small cap tech. A sound proxy for the riskappetite within the sector, if both of these were to start flashing yellow, we would be quick to adjust our view. Semis are starting their most challenging seasonal period of the year, and while we will default to their absolute trend, we have seen a divergence in relative performance versus the sector on their most recent high. For those looking for hedges, a handful of semi names are beginning to act a bit tired and worrisome, representing a pretty good pair trade against leadership. With respect to small cap tech, we have seen relative performance wane over the past few months. Not an outright negative, but a canary in the coal mine that needs to be monitored closely.
While equity trends continue to be constructive, catching up on the charts over the past few days, one thing in particular really caught our eye since we last published a little over 5 weeks ago...the bond market. While yields are fighting the good fight at 2.15% support, the curve has collapsed, and is now the flattest it has been since October of last year. Growth as a style had clearly become extended versus value, and while a reversion in both is to be expected, we have a tough time believing that value can post meaningful absolute and relative performance without bonds cooperating.