APPLE HAS A LOT TO DO WITH TECHNOLOGY UNDERPERFORMANCE -- THE STOCK, HOWEVER, IS IN A POTENTIAL SUPPORT ZONE AND OVERSOLD -- MICROSOFT IS RISING -- SEMICONDUCTOR ETF REACHES NINE-YEAR HIGH -- KLA TENCOR AND TEXAS INSTRUMENTS NEAR MAJOR UPSIDE BREAKOUTS
TECHNOLOGY SPDR HAS BEEN 2013 LAGGARD... My Tuesday message listed technology as one of this year's weakest market sectors. Let's take a look beneath the surface to see what's weighing on the sector, and where some strength lies. Chart 1 shows the Technology Sector SPDR (XLK) bouncing off a support line drawn under its first quarter lows (see arrows). While that has kept the XLK uptrend since last November intact, the XLK still remains well below its 2012 highs. The XLK/SPX ratio (gray area) peaked last September and has fallen throughout 2013. That ratio needs to start rising (or at least stop falling) if technology stocks are going to start helping the stock market, instead of holding it back. Not surprisingly, Apple has played a big role in the XLK underperformance.
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Chart 1
APPLE HAS BIG INFLUENCE ON TECH SECTOR PERFORMANCE... This shouldn't come as too much of a surprise. Despite losing more than 40% of its value since last year (and more than 20% this year), Apple is still the biggest technology stock in the XLK (14%). What may be a surprise is the close correlation of the two lines in Chart 2. That chart compares the trend of Apple (red line) to the XLK/SPX ratio over the last two years. The visual similarity is striking. Both peaked last September and have fallen together since then. That suggests that Apple needs to start stabilizing to help end technology's relative underperformance. An Apple rally would be even better.
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Chart 2
APPLE HAS LOST 5O% AND IS OVERSOLD... The next two charts suggest that the fall in Apple's price may be nearing an end. The weekly bars in Chart 4 show that Apple has now retraced exactly 50% of its rise from 2009 to 2012. In chartwork, a 50% retracement often acts as a floor under a falling stock. In addition to that, the 14-week RSI line in Chart 5 (which peaked last September), is now stabilizing near the oversold line at 30. That means that Apple has reached the most oversold level since 2008. That also suggests that the plunge in its price may now be overdone. There's a little more to Chart 4. My Market Message from October 6 showed the negative divergence in Apple's RSI line (red arrow) which accompanied the headline: "Overbought Apple Looks Vulnerable". The bottom right of Chart 4 shows a positive divergence between the RSI line and Apple over the last month (green arrow). [A positive divergence is present when the RSI line forms a double bottom while the stock's price is dropping]. Any rebound in Apple would take a lot of pressure off the technology sector.
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Chart 3
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Chart 4
MICROSOFT SURGES... Another big technology stock that weighed on the tech sector over the last year was Microsoft which is that sector's second biggest stock. Not anymore.. The daily bars in Chart 5 show Microsoft (MSFT) surging through its spring 2012 high to achieve a strong bullish breakout. The MSFT/SPX ratio (gray area) which had fallen all last year, has also surged. That surely carries good news for that stock and the technology sector in general. It gets even better. The monthly bars in Chart 6 show Microsoft nearing a test of its 2007 peak just above 33. Needless to say, an upside breakout through that previous peak would put the stock at the highest level in thirteen years and would constitute a major bullish breakout. Given the large size of the stock, that would give a nice boost to the tech-dominated Nasdaq Composite Index which has already exceeded its 2007 peak.
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Chart 5
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Chart 6
SEMICONDUCTOR BREAKOUT... Another pocket of technology strength is semiconductors. Chart 7 shows the Market Vectors Semiconductor ETF (SMH) surging to a new 52-week high. The monthly bars in Chart 8 show the SMH trading at the highest level in nine years, and challenging its early 2004 peak (horizontal line). Needless to say, an upside breakout in the semiconductor group would give a big boost to the technology sector, and the market in the general.
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Chart 7
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Chart 8
KLA TENCOR AND TEXAS INSTRUMENTS NEAR BULLISH BREAKOUTS... Two of the larger chip stocks are also on the verge of major bullish breakouts. The monthly bars in Chart 9 show KLA-Tencor (KLAC) nearing a new ten-year high. Chart 10 shows Texas Instruments (TXN) on the verge of a new decade-long breakout as well. Both stocks appear to be emerging from major bases extending back to the start of the last decade. These two charts (and the one belonging to Microsoft) suggest that there are large technology stocks that appear to have a lot of upside potential. Unfortunately, the dramatic drop in the largest tech stock (Apple) has cast a pall over the entire technology sector which has lagged behind the broader market this year. That pall may begin to lift if an oversold Apple stabilizes or, even better, starts to gain ground. The good news is the pullback in technology may be offering investors an opportunity to accumulate the sector at a cheaper price.
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Chart 9
