Earnings in the technology sector have been solid to impressive. However, the investor reaction has not been kind. Intel (INTC) posted another stellar quarter and the reward was a 1% loss. Apple (AAPL) couldn’t have been better and the stock drops 3%. F-5 Networks' (FFIV) earnings were in line, but the guidance was disappointing, down 20%. The semiconductor sector was down 2.3% and technology was off 1% yesterday. The headlines in the financial media are full of doom-and-gloom relative to the sector. Is this the correction/pullback to balance out the overbought indicators analyst have highlighted? Time will tell, but our job is to manage the risk of our money related to our objectives.
Breaking down the technology sector allows us to see the moving parts and make a clearer decision relative to our holdings. Starting with semiconductors, they have moved higher since the January 6th break from a consolidation pattern and the upside has accelerated. There are two areas of concerns, LEDs and cloud computing stocks. Both components had big moves to the upside and the earnings are not validating the moves. SemiLEDs Corp. (LEDS) fell 30% on earnings and CREE, Inc. (CREE) fell 15% on earnings as well. They have put pressure on the semiconductor sector overall. In the cloud computing sector, F-5 Networking reported and was down 20% on “weak guidance”. The ripple effect to other cloud computing stocks resulted in 3-7% pullbacks. These sub-sectors have been the leaders for the semiconductor sector. Based on your time frame for holding you have to manage this risk accordingly. If you didn’t have an exit or stop on these positions you have questions to answers moving forward. Both of these sub-sectors have issued exit signs short term.
The networking sector lost 2.3% and the effects of the cloud computing sectors drop is adding downside pressure to specific stocks like Juniper Networks (JNPR). iShares S&P GSTI Networking Index ETF (IGN) shows support at $33.76, which would be approximately 8% off the recent highs. This has been a strong component of the technology sector and it is worth watching short term to see how it plays out. Use stops to protect your downside risk.
Computer hardware is struggling in the wake of the tablet euphoria. Seagate (STX) reported an earnings decline missing estimates. Sales fell 10% and the outlook is for more of the same next quarter. The demand in Asia was down, which has been a theme in several areas of the technology sector. The LED sector reported the same news and raises questions about the strength of Asia looking forward. The increased sales in tablets is the blame in the many of the computer hardware stocks as PC sales lag. The outlook for the hardware and primarily the disk storage space is negative. We have a sell rating on this sector currently.
On the positive side, software stocks are doing well as earnings in the sector thus far have been positive. iShares S&P GSTI Software Index ETF remains in the current uptrend. We have stops just below the support of $58.20. There are still plenty of earnings to come in this sector, thus manage the risk. Our current rating on the sector is a hold.
Technology is experiencing growth pains. What the outcome is short term, is in motion, and time will tell. Analysts are optimistic in their views looking forward. Our research shows a positive longer term view for the sector and the uptrend is still intact, but the warnings sign have been posted. Money is rotating toward positive momentum and away from challenges or concerns. Manage the risk accordingly, and look for the opportunities in the aftermath of the move.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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