As the fourth quarter earnings season gains mileage, the
broader markets seems to be poised for a strong surge. This is
especially true considering the positive economic developments
that have taken shape of late and the surprisingly solid earnings
picture put up by corporate America thus far.
The technology sector will be in focus this week as giants
like
Apple Inc (
AAPL
)
,
International Business Machines (
IBM
)
, and
Microsoft (
MSFT
)
are all set to announce their quarterly results. The sector has
been facing tough times of late with the overall business
spending, while consumption for I.T. firms have witnessed a
strong decline as well (see
Strong Auto Sales: Good News for Metal ETFs?
).
This has surely made a dent in investors' confidence in
respect of this sector. As a result, the once reigning tech
sector which was leading the broad market rally is actually
trailing it by a rather wide margin.
Given this situation, it is imperative for the Tech
bellwethers to put up a good show this week to revive the sector.
The following one year price chart analysis of the
Technology Select Sector SPDR ETF (
XLK
)
exhibits mixed results.
The ETF managed to reach its 52 week high of $31.74 last year
in September. It was a time when the Technology sector was
leading the broad based market rally. However, since then, the
ETF has shown signs of weakness.
Also, the recovery post the election sell-off in mid November
has been quite disappointing and finally it seems the ETF has
entered a choppy trading period (read
Diamond ETF: An Investor's Best Friend in
2013?
).
Earlier in 2012, the ETF had faced similar headwinds when it
remained directionless (with a flavor of bearishness) for a
decent period of time (indicated by the bigger rectangle). During
that time the
Parabolic Stop and Reversal (SAR)
did not make much sense either in terms of direction of the
technology ETF.
However, then came the second quarter earnings season which
was fairly positive for the tech sector as a whole. This acted as
a catalyst for an uptrend for the ETF and its prices soared.
Currently we again find ourselves in a similar situation
without an indication of a clear cut direction as confirmed by
the Parabolic SAR which indicates choppiness (indicated by the
smaller rectangle). And this time around also earnings will be
the key catalyst that will decide the upward or downward trend
for the ETF (read
3 Apple Proof ETFs
).
The
Relative Strength Index (RSI)
also confirms this lack of direction in this ETF as is indicated
by its neutral reading (around 50) for quite some time now
(highlighted portion).
However both these above mentioned situations are not exactly
similar as indicated by the chart below.
Comparison with the Broader Market
The tech sector is highly correlated with the S&P 500
since the giant large caps in the sector get a bulk of the
weightings due to the extremely large market capitalizations.
With this thought it is imperative to note that the period in
question in the bigger rectangle was characterized by a down
trend in the S&P 500 as well. Therefore a fair bit of
weakness was more or less expected in this ETF.
However in this present choppiness, the case it not the same.
Even after the New Year rally, the broader market (i.e. S&P
500) has been able to pick up momentum as indicated by the green
circle.
Despite this broader market strength, the Technology ETF has
been down trending (as indicated by the red circle). And in an up
trending market this clearly is a sign of weakness brewing (see
Two Sector ETFs to Buy in 2013
).
Speaking of Trends
XLK is currently trading below the 100 DMA (red line) which
might act as a strong resistance. Nevertheless, despite the
impressive New Year rally, the ETF has severe short term weakness
as the 50 DMA (blue) is trending below the 100 and 200 DMA
(green) lines.
Bottom Line
The Technology Select Sector SPDR ETF (XLK) is surely set for
an exciting trading week ahead; however, it is time to focus on
the fundamentals for the time being. Any slight
'higher than expected'
results from the Tech bellwethers are expected to push prices
up.
Conversely, a dismal show could well see the ETF plummeting to
levels even below the 50 DMA support line. Clearly,
earnings hold the directional key for XLK
.
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APPLE INC (AAPL): Free Stock Analysis Report
INTL BUS MACH (IBM): Free Stock Analysis
Report
MICROSOFT CORP (MSFT): Free Stock Analysis
Report
SPDR-TECH SELS (XLK): ETF Research Reports
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