Wind Beneath the Rally
We know this rally has been powered by big tech names. While there have been other pockets of strength, the question is: what could provide the wind for a broad rally if all those big tech names slip or start to move sideways?
Last week was a challenging one for technology stocks, especially for those high-flying technology names that have carried the entire market for the last two years.
The S&P Technology Sector (XLK) was down 1.7% on Friday. However, it was higher for the week, underscoring the fact that tech is more than just those famous - or should I say those infamous FAANG names:
With that in mind, however, can those other tech names and the rest of the market move higher with the same vigor, as some of the FAANG names stumble?
It must have been cold there in my shadow,
To never have sunlight on your face.
-Jeff Silbar & Larry Henley
Before we announce the death of Big Tech, keep in mind that (except for Facebook, which is unchanged), there are other areas of tech for the year. The other areas of tech include computer chip stocks, up last week along with cybersecurity and software; both are enjoying fantastic gains this year.
I believe cybersecurity stocks have significantly underperformed the headlines of cybercrime, including attacks on our elections. I want to embrace the sector more, but I’m having trouble because execution has been very uneven and sell-offs from disappointing earnings are often huge.
I like software. I believe this is a great niche of potential outsized gains for 2018 and 2019.
Then there are the chip ideas, which have been known to go into multi-year depressions. There are individual ideas in semiconductors that should outperform the market – but it’s a stock pickers niche.
As for those Big Tech names, I think there is still a lot of money to be made. Years ago, I put out four stocks I deemed “never sell,” which included Boeing (BA). Right now, I think Amazon (AMZN) has that distinction. The company’s last earnings release was mind-boggling.
The company’s earnings were 100% better than anticipated and a thousand percent year-to-year improvement. It’s true that brick-and-mortars are learning how to compete in retail, while other tech companies are rushing to compete in the Cloud. I think the only thing that could stop a company’s earnings is governmental intervention/antitrust.
Apple (AAPL) was on my original “never sell” list, and I still have it in retirement accounts. I believe management should be more aggressive, but no one can argue with success. The company reports this week, and I’m looking for strong results.
Halfway through earnings season, tech has been one of the bright spots as 36 of 71 S&P Tech names have already posted results:
Because technology is so volatile (High-beta), using key metrics such as moving averages as buy-and-sell signals is difficult. Still, I think investor resolve would be tested if the XLK were to close beneath its 50-day moving average (see chart). The big moment of truth might be 68.66 from June 27th.
I think tech must be overweight in most portfolios, even with the recent wobbles. In fact; in many ways, the number of opportunities has increased as major funds rotate out of the same old names.
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