The PowerShares QQQ (NasdaqGM: QQQ), which tracks the tech heavy Nasdaq-100 Index, is up 5.5% over the past month while the Technology Select Sector SPDR (NYSEArca: XLK) is higher by more than 7% over the same period.
While impressive, those performances have some market observers concerned that the technology sector, the largest sector weight in the S&P 500, has rallied too far too fast and is vulnerable to some near-term downside.
The FANG stocks — Facebook (NasdaqGS: FB), Amazon (NasdaqGS: AMZN), Netflix (NasdaqGS: NFLX) and Google or Alphabet (NasdaqGS: GOOG) – among others, drove technology ETFs higher last year and then proceeded to weigh on the sector early this year. Not surprisingly, the FANG quartet has helped lead the recent tech rebound. Apple (NasdaqGS: AAPL), Amazon, Alphabet and Microsoft (NasdaqGS: MSFT) are major components in QQQ and XLK, accounting for significant percentages of those ETFs’ respective lineups.
Some technical analysts see a pullback looming for Alphabet as the Internet giant moves toward its next earnings report in April. Looking at Alphabet’s charts, Todd Gordon told CNBC’s “Trading Nation” that the stock is primed for a pullback.
“”What we had was a rally, then a step back into a higher low,” he explained on CNBC. “But the key indicator that we are in a corrective rally is we got another push that was exactly the distance of the prior rally and that failed,” said the founder of TradingAnalysis.com. “I think the downtrend is going to resume.”
Tech ETFs face another problem: Weakness in semiconductor stocks. The semiconductor industry faces some headwinds. Research firm Gartner anticipates that worldwide shipments of personal computers, tablets and smartphones rose only modestly last year, which could cause chip sales to decline.
[related_stories]Mature tech companies, such as Apple and Microsoft, can help investors generate income by way of steadily increasing dividends. That is a departure from the tech boom of the 1990s when dividends were a foreign concept to the sector.
Traditionally, tech companies have not considered paying back their investors. Instead, many firms opted to reinvest cash back into the company or buy back stocks.
However, times are changing, and the technology sector of the S&P 500 is now among the top dividend issuers. Technology companies began to compensate shareholders during the financial crisis, and the habit stuck.
PowerShares QQQ
Tom Lydon’s clients own shares of Apple and Facebook.