Dear Bottarelli Research Reader,
Now that we’re past Memorial Day, let’s look at the situation facing tech stocks. Why? Because this is a sector that traditionally sags in the summer months.
Over the past ten years, the Technology Sector Select SPDR (XLK – NYSE) has dropped during eight summer periods while rallying in only two (illustrated below).
Some folks claim this summer drain is because so many technology end-users take vacations between June and September.
Then, there are tech gurus (like Jim Cramer) who recently ranted on CNBC’s Mad Money that “desperate attempts to make sense out of the nonsensical can cost you...Sometimes stocks or the whole market will go up or down for reasons that have nothing to do with the underlying prospects of actual companies. Sure, you’ll search for a legitimate answer and the media will offer a few as well. But there will come a point where you’ll have to admit, that the moves are just nuts.”
That’s a long-winded way of saying, “I don’t know why it happens – it just does.”
Cramer goes on to complain that the big hedge funds have all become lock-stepped zombies that buy and sell the market’s entire float based on the same limited signal set.
Here at Bottarelli Research, we look at things a little differently. We see this sort of “group-think” as a hidden benefit.
You see, our Stacked Signal algorithms are designed to detect the actions of these ultra-connected “wise guys” as they move shares, ETFs, or even whole sectors through a cycle of four Dow Phases:
- Stealth Accumulation (Wise Guys buy from Herd)
- Public Participation Spike (Herd buys up prices; Wise Guys ride for free)
- Stealth Distribution (Wise Guys sell out to Herd)
- Public Collapse (Herd sells out – and crashes prices across the board)
It’s handy to know when share groups move through these phases. It certainly soothes the mind to have some kind of clue as to what these billion-dollar cowboys are thinking at any given moment.
But frankly, it’s not essential. After all, the charts always know what they’re doing, regardless of what screwy reasons they latch onto. This is a big relief because we’ve seen a great deal of evidence lately that the folks who run these funds may not be the smartest guys in the room after all.
When they screw up, it costs investors billions.
That’s why we carefully monitor our own proprietary charting signals so closely. When you apply our system to the Technology Sector Select SPDR (illustrated below), you see that even Cramer’s “crazy markets” can be quantified, analyzed, and understood:
- First we saw the old rising trend fail at resistance at $30.68.
- Then we saw its bottom line break.
- MACD gave us a Sellers Cross.
- The A/D line indicates that share distribution is well underway.
In most cases, this would mean that a stock or sector was pretty much screwed. The wise guys have been selling out for a while already, and now the public is just starting to smell the blood.
But, this system is more sensitive than that. It can even detect hidden pockets of strength – usually a pool of investors committed to purchasing the asset on all dips.
And right now, tech stocks are showing exactly that sort of hidden strength.
Take note of how the XLK has rallied off support at the node where the 200-day average met the 38.2% retracement level at $27.43. A reversal this early indicates a rising probability of a real turnaround.
With this indicator in hand, it leads to the question…
“Will tech stocks of the XLK beat the Stacked Sell Signals – and the summer curse?”
Mobile Gobbles Up Desktops’ Market Share
When you break open the XLE, you really get a mixed bag.
First, you have some pretty iconic components showing signs of distress:
- Cisco Systems (CSCO – NASDAQ) barely made the bar on EPS and guided lower.
- Dell (DELL – NASDAQ) missed estimates and then guided lower.
- Hewlett Packard (HPQ – NYSE) beat on EPS but announced it would cut 27,000 jobs.
But, we can’t talk about technology without noting Apple (AAPL – NASDAQ).
AAPL shares dipped heading into the Facebook (FB – NASDAQ) IPO. For a while, analysts thought it might be some obscure detail of Apple’s contracts with various iPhone service vendors dragging the stock down.
The accepted wisdom is that the aforementioned major funds were trading in AAPL shares to fund their obscenely large FB commitments. Now word is circulating that on June 11, Apple will release a new iPhone with a larger screen that is “some of the best design work they have ever done.”
Is AAPL a Buy?
When we look to its technical chart (illustrated below), we see our usual Stacked Sell Signal marking the moment when the wise guys began to sell. But, we also can also see when AAPL’s true believers stepped in to support shares at the critical test at $536.76. As I write, AAPL is breaking out of the 11-week long falling trend.
Frankly, while I do see a chance that AAPL will rally back to $600, paying $566 a share makes the whole idea of approaching AAPL a tad outrageous. How would you adjust risk – sell half a share? I believe that Apple deliberately keeps the stock at this price for two reasons:
- They think it makes them cool.
- They think it will somehow dampen volatility.
Neither is really true. That crazy price just means that only those “insane” hedge fund wise guys can afford to actively trade AAPL.
How To Play It
This brings us to our long-standing alternative to AAPL: Corning (GLW – NYSE).
As we mentioned in the past, GLW makes Gorilla Glass, the super-strong, super-clear faceplate used in every significant entry in the touch screen market: AAPL’s iPhone and iPad (and most probably their new mid-sized iWhatever).
Anticipation of strong sales of all three products will drive GLW shares (illustrated below) back up through their recent trading range to at least $14.11.
At that point, we will see if APPL’s newest toy is for real. If AAPL hits another home run, GLW will ride this success back up to $18.57.
So, we continue to like shares of GLW as a cheap proxy for Apple’s continued upside momentum.
As always, the charts tell all.