Technology stocks: The next great opportunity?

Back in late December, I warned readers of this blog that the NASDAQ was painting a “worrisome picture”. Here is my blog advising that the index had a long overdue correction pending. I noted that it was the most vulnerable part of the market, and readers should consider taking some evasive action. I do hope that  you heeded my words. The NAZ is down something close to 20% since writing that blog.

The main just of my convictions were that the NAZ was parabolically overbought, aided by many of the ridiculous valuations of many of the overweight stocks within it. Specifically, I was more concerned about the technology and “stay inside” stocks – than some of the other components of the index. Well, here we are less than 3 months later with a 20% correction at hand.  I’ll bet a few of you are now wondering if there are bargains to be had on the NAZ. This blog addresses that potential. I’d like to concentrate on the technology stocks in particular, and to do that I will focus on the SPDR Technology ETF (XLK) for technical clues. Lets get at it:

No proven support – yet

My chart below shows us that the weekly trendline and 40 week SMA have been broken. The most recent support level near $150 was definitively cracked. Next support of $140, and finally around $135 need to be proven by a period of at least 3 days (preferably over a week) of adherence. So, its too early to say if XLK is finished with its decline.

Moneyflow momentum (top indicator) is bearish and yet not oversold. So there could be more money exiting the ETF before things settle down. Stochastics, RSI, and MACD are all oversold – but have NOT hooked up yet. Again, they are showing that things are “getting there” for the sector – but no sign of early buying or early positive price momentum yet. Still, we should keep an eye on the support levels indicated along with hook-ups on the momentum indicators.

Insiders are buying Tech stocks

Sentimentrader.com’s Jay Kaeppel – a well respected trader who I admire very much noted that insiders are buying their shares, despite the massive drawdown on technology stocks. “The persistent and enthusiastic buying by tech insiders stands completely apart and seems to make no sense at all. So the question becomes, “Are tech insiders crazy, or do they know something we don’t know?” What might cause these executives to ignore the doom-and-gloom pundits and buy heavily instead? ”

Below is a chart from Jay’s recent blog. It tracks the insider buys of the stocks that comprise the XLK ETF, and pits that data against XLK itself. As such, we get a picture of whether insiders buying their shares are leading indicators of good times to come for the sector ETF. The red dots on the “buying” plot at the bottom of the chart shows us where they were buying. The table below the chart shows that the pattern of insider buying has a pretty decent track record when looking out 2 or more months. Here is Jay’s chart:

Sentiment is oversold

Optimism Index (OPTIX) indicators by Sentimentrader.com give us a multi-faceted look at various investor confidence behavioral patterns.  OPTIX readings are created by Sentimentrader.com. Their OPTIX data for ETFs is based on data including:

• Trading activity in put options versus call options
• Future volatility expectations
• Average discount of the fund to its NAV
• Price behavior

The OPTIX chart shows us that investor sentiment for XLK is deep into the “capitulation” phase. This, as you can see on the chart, typically leads into a turnaround.

Seasonality

Equityclock’s seasonality chart suggests that, while February and March can be a bit soft for the sector, things can pick up in April and May. I’ve circled July on the chart as well, because, despite the traditional spring selloff (June) for the sector, July seems to get a nice pop. Keep in mind that seasonal patterns are simply averages. They are not actual price chart patterns. But the patterns suggest that the above factors may be setting XLK up for a potential pop some time after this month finishes.

Conclusion

As a Technical Analyst and trend analyst first and foremost, I must await some stabilization within the tech sector before buying. Having said that, there are some signs noted above that such a period may arrive soon. As such, we should keep an eye on the technology sector and favored stocks within it. There is probably a great opportunity coming to the sector soon. Just don’t be the one to catch that knife while its still falling. Patience, grasshopper!