Good morning. Well, if last Thursday’s 75 handle reversal on the S&P couldn’t stem the decline, let’s see if yesterday’s 55-point reversal will do the trick and finally provide investors with some much-needed holiday cheer. With equity trends and credit under consider pressure globally, identifying leadership trends is no easy task. Which is why I wanted to flag two recent launches at Wolfe that provide a fair amount of opportunity against an uncertain macro backdrop. Marci Ryvicker launched on 25 Media & Distribution names last Thursday (Marci's Launch), where ‘Outperform’ rated names DIS, DISCA, FOXA, ATUS, CCO, GRN, NXST look particularly compelling from a technical perspective. Steve Milunovich launched on IT Hardware and Networking stocks last night after the close (Steve's Launch). Comm Equipment is a standout from an absolute and relative trend perspective, with Cisco one of the better-looking charts in the market today.
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Away from select M&A here and there, it’s been a tough stretch for media. Which is why the chart of one of the group’s longest standing members grabbed my attention last night. Since peaking 3-years ago in the summer of ‘15, Disney has struggled to exhibit any sense of momentum, languishing in a tight range ever since. I get the bear case and the love affair with new media, but if the stock can eclipse
the $112 level, the bulls will feel like Simba stepping onto Pride Rock after defeating Scar (FYI...my 16-year old gave me that analogy)
Semis aren’t acting well. Now, either is the overall market, but the deterioration in this former leader’s relative performance has been noteworthy of late. Internal divergences have been building over the past few months - a reality that is just now starting to be priced into equities. Semis and the broader tech tape have tended to trade together historically and I have a tough time believing that this time is different, and that the sector can sidestep what is already starting to ail pockets of the sector. As we get into the thick of earning’s season, how stocks react to what is widely expected to be upbeat news will be particularly telling. For now, stick with leadership (e.g. Software and Comm. Equipment), as their relative trends should help buffer headwinds as they appear.
For a sector that looked to be exhibiting a few cracks beneath the surface entering 2018, technology sure did respond to last month’s oversold setup. The best performer since the February 9th intraday low, tech has been the only sector to recoup all of its losses and then some, an impressive rebound that also saw a fresh relative high. To avoid getting sucked in and reversing our relative trepidation, it’s worth noting that internal momentum (1-month highs) contracted noticeably on the recent high (a sign of narrowing leadership), the opposite of what the sector has displayed in previous oversold rallies. This momentum divergence is also shared by other measures as well, with equal weight indices, semiconductors relative performance and RSI providing a similar message. I had raised the question in early January whether tech was beginning to lose its leadership status, and despite the strong move off the lows, my concerns remain.
After trouncing the competition last year, the technology sector has gotten off to a quick start in ’18, rallying nearly 5% to start the year. However, due to a few cracks beneath the surface, I’m beginning to question the sustainability of its leadership. Since that initial shot across the bow back in late November (What a Day...Is the Momentum Trade Over?), I’ve been on the lookout for signs that the sector is ready to hand off the leadership baton. While tech responded out of that November scare by rallying to fresh highs, the lack of a few key attributes during this seasonal move has left me somewhat uneasy. Relative performance has diverged on the sector’s new high, while semiconductors and small caps have failed to confirm as well. More troubling however, has been the steady loss of internal momentum, particularly on an equal-weighted basis. I might be a bit early, but with these growing divergences, if given a clean sheet of paper, I’d be more inclined to reduce exposure and position for increased volatility on the horizon than press longs. Any thought of bearishness or concern has been steamrolled by this tape, so the fact that I gave myself agita writing today’s note only reinforces why I believe it is the prudent thing to do.
Digesting its latest overbought condition following a well received earnings season, tech continues to impress. While we continue to see some moderation on an equal weighted basis as you move down in capitalization, the sector’s broader trends remain firmly intact. With the S&P Technology sector up 37% year to date (versus the S&P 500 +15%), and its weighting in the index at its highest level since the peak in ’99, I have received a fair amount of questions on how long tech’s leadership can carry on. From a technical perspective, I have always used semis and small cap tech as a risk proxy for the sector, and while I admittedly don’t love that small cap tech still hasn’t reclaimed the relative high set back in June (we discussed this momentum divergence back in early August), absolute trends are sound. Semis on the other hand, buoyed by a steady stream of M&A, continue to act great. At some point, dips in the market will not be aggressively bought, and oversold conditions will not hold, but for now, the path of least resistance continues to point upward. You could even argue that the sector would benefit from a risk-off environment related to growth concerns, as investors are likely to rotate towards the secular growth, strong cash flows and bulletproof balance sheets that large cap tech has to offer. Oh and if the chart below was a stock, I’d likely say that from a technical perspective - “breaking out from a big base, it looks like the highs are in play.”
Outside of semis ripping and reversing their relative divergence, little has changed from a trend perspective over the past month within the TMT space. Although we continue to see some moderation on an equal weighted basis, outside of communications equipment, tech continues to look solid, media not so much, and telecom even less so. Juniper (JNPR) has been a great example of the technical concerns I have had around comm equipment, and while the bigger picture trends remain worrisome, the oversold condition that developed following last week’s earnings preannouncement likely marks an interim low for the stock. Despite media’s struggles, Comcast (CMCSA) has been one of my favorites, and I have to admit that the past 6-weeks have not been kind to that bullish view. Oversold at longer-term support, failure of momentum to develop would be a victory for the bears and increase the likelihood of the stock seeing the low $30s.
Accelerating to yet another all-time high, large cap technology continues to possess one of the strongest trends in the market today (9/12). Unfortunately, the same cannot be said across the capitalization spectrum, where small and mid caps have been digesting a few of the cracks that we discussed in early August. While divergences can persist and admittedly are terrible timing tools, we find it somewhat suspicious that the riskier part of the sector has peeled off. Industry wise, two really standout, where software continues to exhibit strong relative momentum, while comm equipment’s corrosion persists. Whether positioned to break out from a longer-term base or acting particularly distributive on a multi-year basis, today’s report takes a look at 10-stocks that caught my eye within the tech sector.
Despite a fair amount of price volatility over the past 5-weeks, little has occurred to alter our view that technology is in the midst of a typical consolidation following a dramatically overbought condition. We’re constantly on the lookout for divergences, keeping a close eye on semis and small caps for a sign of growing risk aversion, something we have yet to definitively see. The one group that continues to trouble us happens to be Communications Equipment. Absolute trends are finally catching up to what relative strength has been sniffing out, with a growing list of names looking increasingly vulnerable as we head into earnings season.
Firmly within an uptrend, technology has been digesting both internal and external overbought conditions. It’s too early to say whether the violent intraday reversal from a couple of weeks ago is the start of a bigger problem for the sector, but we’ll be keeping a close eye on a few indicators that have served us well historically, semis and small cap tech. A sound proxy for the riskappetite within the sector, if both of these were to start flashing yellow, we would be quick to adjust our view. Semis are starting their most challenging seasonal period of the year, and while we will default to their absolute trend, we have seen a divergence in relative performance versus the sector on their most recent high. For those looking for hedges, a handful of semi names are beginning to act a bit tired and worrisome, representing a pretty good pair trade against leadership. With respect to small cap tech, we have seen relative performance wane over the past few months. Not an outright negative, but a canary in the coal mine that needs to be monitored closely.
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