Skip to main content

A Divergence in Tech - why it's important

What is going on in tech these days and why is it important?

If you read the post "Chart of the Day: Looking for Sector Leadership" at the Vix and More blog, you can see from the chart that tech is not the leading sector in the current rally (there are several sectors doing better) but but it has been performing decently. To see the rally continue, however, investors would like to see tech step up and assume more of a leadership role as it usually does when stocks break out to new highs.

Something is holding tech back. Let’s look at three tech-focused ETFs and see graphically what is happening.

The first is the iShares Dow Jones Technology Index ETF ($IYW). You can see a beautiful breakout above the 200-DMA and the 50-DMA. Indeed, the 50-DMA is now trending upward.


The next one is the iShares S&P North American Tech-Software ($IGV). This ETF is in a full-fledged, all-out bullish trend.


Finally we have the iShares S&P/GSTI Semiconductor ETF ($IGW). This ETF is noticeably lagging the other tech ETFs. And no wonder, with Intel reducing guidance a month after their earnings report, analysts from JP Morgan and other institutions pointing to slowdowns in the supply chains for PCs and flat-screen TVs, Texas Instruments giving lackluster guidance recently, Samsung's CEO saying today that LCD and chip profits have hit a peak, reports from Taiwan that PC component sales are slowing and fab capacity is increasing, etc.


This chart is certainly showing improvement but where the other charts are showing clear signs of a breakout, this chart looks like it's just getting started. Some might ask whether the reversal in semiconductors is even real given that the ETF struggled for three days just to break above its 50-DMA.

Can tech outperform without the semiconductors?

The following is a list of all the industries that are considered part of the tech sector according to data I gathered from the NASDAQ web site.

Tech Sector Industries:
  • Advertising
  • Computer Communications Equipment
  • Computer Manufacturing
  • Computer peripheral equipment
  • Computer Software: Prepackaged Software
  • Computer Software: Programming, Data Processing
  • Diversified Commercial Services
  • EDP Peripherals
  • EDP Services
  • Electrical Products
  • Electronic Components
  • Industrial Machinery/Components
  • Professional Services
  • Radio And Television Broadcasting And Communications Equipment
  • Retail: Computer Software & Peripheral Equipment
  • Semiconductors
  • Telecommunications Equipment

There are a total of 17 industries in the list.

This next list is the sub-set of industries that are clearly not reliant on semiconductors:
  • Computer Software: Prepackaged Software
  • Diversified Commercial Services
  • Professional Services
Note that Advertising includes at least some companies that are primarily involved in online advertising. These companies usually maintain large server farms from which ads are served and tracked and, hence, can be considered to have semiconductors somewhere in their supply chain.

So here’s the quandary: It is understandable why the software companies are doing well, especially after an excellent earnings report from Oracle last week. Indeed, Gartner just released a report indicating that worldwide enterprise software revenue is on pace to surpass $232 billion in 2010, a 4.5 percent increase from 2009 revenue of $222.4 billion. No double-dip in the software industry, apparently. Though sales are expected to be most robust in the Asia/Pacific region, enterprise software spending in North America is forecast to reach $110.8 billion in 2010, an 8.5 percent increase from 2009 revenue of $102.1 billion. Gartner says the market will experience consistent growth through 2014.

But what about all those other tech companies?

Pretty much all hardware companies use semiconductors in their products. It seems reasonable to say, therefore, that companies involved in manufacturing hardware or companies that are heavily dependent on using technology products should, by extension, feed demand for semiconductors.

But the charts seem to show that investors don’t expect that semiconductor demand to materialize.

Which way to jump?

There are two possible scenarios.
  1. Tech stocks continue to rise and semiconductors, currently lagging, offer an excellent entry point before they begin to catch up with their high tech brethren. With the PC industry only responsible for approximately 40% of chip demand, perhaps semiconductor stocks can join the rally despite the signs of a slowdown in PCs. That seems like a big "perhaps" but given that at least 13 out of 17 industries in the tech sector require semiconductors, it just might happen. Especially if the economy cooperates
  2. Tech stocks have gotten ahead of themselves and the poor performance of the semiconductors suggests a pullback is overdue. Is some of the rise in tech stocks due to the buyout mania currently sweeping the industry? It is instructive to note that of the recent acquisitions by IBM, Cisco, HP and Intel only one of them acquired a semiconductor company and that is Intel when they bought the RF chip business of Infineon. Even Intel went for a software company when they acquired McAfee.
This week we will see the Durable Goods report for August so we'll get some better insight on the state of the hardware manufacturers (semiconductors are no longer broken out separately).

And so, back to the original question: can the market put on a substantial rally without tech? Probably not but it seems the market can definitely rally without the semiconductors, at least for a while. Nevertheless, I have to consider the lack of participation by the semiconductors to be a warning sign, even as I enjoy the rally.

Disclosure: no positions

Comments

Popular posts from this blog

Running TradeRadar on Windows 7 and Windows 8

Development of the original TradeRadar Stock Inspector software was begun back in the days before Windows 7 and Windows 8 were available.

As these newer versions of Windows have become more popular, we have heard from some users that they are having problems installing and running TradeRadar on their newer PCs.

The good news is that TradeRadar will work just fine on Windows 7 and Windows 8. All you have to do is adjust the Windows Compatibility Settings to ensure TradeRadar runs as intended.

It is recommended that you can apply Compatibility Settings when running the initial installation; however, it is also possible to apply Compatibility Settings after the program has been installed.

Prior to installation
After downloading the install program, go to the folder where you have stored the TradeRadarStkInsp_7_Setup.exe or TradeRadarStkInsp_7_PRO_Setup.exe executable. Right-click on the executable file and select Properties. Click the Compatibility tab. Adjust the Compatibility mode to …

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position.

This first post in the series starts at the beginning: getting good investment ideas.

Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets.

As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professionals and …

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas.

Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what to lo…