WEAKNESS IN A HANDFUL OF BIG TECHNOLOGY STOCKS (LIKE APPLE) MASKS MUCH BROADER NASDAQ STRENGTH -- NASDAQ LEADERS INCLUDE CISCO, EBAY, GOOGLE, ORACLE, AND YAHOO -- SEMICONDUCTOR ETF EXCEEDS SEPTEMBER HIGH
NASDAQ MARKET SHOWS SHORT-TERM NEGATIVE DIVERGENCE... The only major stock index that has yet to exceed its 2012 high is the Nasdaq Composite. Chart 1 shows the COMPQ still trading below its September high. Of more concern is the fact that the Nasdaq has been underperforming the S&P 500 over the last five months (falling red line). That's normally a short-term caution sign for the market since the Nasdaq is viewed as a proxy for the technology sector. Today's messsage will look beneath the surface to help determine if the Nasdaq weakness is giving a true representation of the technology sector. I suspect that it isn't.
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Chart 1
THREE BIG STOCKS WEIGHT ON NASDAQ... Chart 2 shows the relative performance of three of the biggest technology stocks in the Nasdaq market since mid 2012. The three big stocks in order of size are Apple, Microsoft, and Intel. The lines show all three technology stocks underperforming the Nasdaq during the second half of last year, and especially since September when Apple tumbled. The Nasdaq has traded flat since last September. During those five months, Apple tumbled 33%, while Intel and Microsoft lost 16% and 11% respectively. The plunge in Apple, which is the biggest technology stock, is the biggest reason why the Nasdaq has underperformed the rest of the market this year. Relative weakness in Intel and Microsoft has hurt as well. Weakness in those three giants, however, is masking technology strength elsewhere.
Chart 2
NASDAQ LEADERS ... Chart 3 shows five of the largest technology stocks in the Nasdaq market doing much better than the Nasdaq over the past six months,. They include Cisco (+31%), Ebay (+26%), Yahoo (+24%), Google (+18%), and Oracle (+17%). Relative strength in those five technology leaders has helped support the Nasdaq since last September. In fact, more of the large technology stocks in the Nasdaq have risen during the past five months than have fallen. That suggests that a small number of really big tech stocks are holding the Nasdaq back and may be masking broader strength in the technology sector. There's more evidence to support that premise.
Chart 3
SEMICONDUCTOR ETF EXCEEDS SEPTEMBER PEAK ... Semiconductors remain one of the most influential groups within the technology sector. The good news is that the Market Vectors Semiconductor ETF (SMH) has exceeded its September peak and is trading at the highest level since last spring (Chart 3). Its rising relative strength ratio (green line) also shows market leadership since October. Chart 3 shows improvement in a key technology group. It also reflects improvement in a number of large technology stocks in the chip space.
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Chart 4
BIG CHIP LEADERS... Three of the biggest Nasdaq stocks in the Market Vectors Semiconductor ETF show very promising chart patterns. The monthly bars in Chart 5 show Analog Devices (ADI) exceeding its 2011 high and in the process of challenging its early 2004 peak at 43.40. A close above that level would put this technology stock at the highest level since 2001. Chart 6 shows Texas Instruments (TXN) trying to break above a bullish triangular formation in effect since 2011 (see converging trendlines). A close above the upper line would set the stage for a challenge of its 2007 peak just above 35. The two circled lows formed during 2002 and 2009 suggest a potential "double bottom" formation being formed. A close above the 2007 high would complete that bottoming formation. Chart 7 shows Xilinx (XLNX) trying to break above an "ascending triangle" in effect since 2011. (An ascending triangle has a flat upper line and rising lower line and is a more bullish pattern). A close above its early 2004 peak near 38 would signal a major new uptrend. All three chart patterns show large technology stocks on the verge of achieving major upside breakouts. That should carry good news for the technology-dominated Nasdaq market and market as a whole.
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Chart 5
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Chart 6
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Chart 7
NASDAQ IS LEADING STOCK MARKET OUT OF LOST DECADE... The decade since 2000 favored bond prices at the expense of stocks. I believe the next decade will be much better for stocks, and much worse for bonds. Chart 8 shows one of the reasons why. The monthly bars show the Nasdaq Composite Index collapsing during 2000 which started the first bear market of the new century. After losing 78% of its value, the Nasdaq Composite traded sideways between its 2002 low and its 2007 peak. A second bottom was formed at the start of 2009 which formed a major "double bottom". During 2012, the Nasdaq rose above its 2007 peak to complete that major basing pattern. The Nasdaq collapse twelve years ago led stocks into a "lost decade". Chart 8 suggests the Nasdaq is leading stocks into a new secular uptrend. (Secular trends usually last for a decade or longer). When the Nasdaq broke out last year, a number of skeptics suggested it was solely due to the strong action in Apple (red line). The monthly bars in the last circle, however, show the Nasdaq holding that bullish breakout -- despite the plunge in Apple. The reason for that is because most other big technology stocks also show long-term bullish chart patterns. A number of them are featured in this message. Chart 8 carries bullish implications for the stock market in the years ahead. Investors are just beginning to unwind their huge bond holdings most of which will most likely move into stocks.
