Underscoring the recent weakness in the technology sector, the Technology Select Sector SPDR (NYSEArca:XLK), the largest technology exchange traded fund by assets, is lower by 4% over the past month while the tech-heavy PowerShares QQQ (NASDAQ: QQQ) is off by nearly the same amount during that stretch.
However, some market observers and technical analysts see technology, the largest sector allocation in the S&P 500, as primed to end its recent skid. The recent retrenchment in the technology sector has been spurred by well-known names, including Apple Inc. (NASDAQ:AAPL), Facebook Inc. (NASDAQ:FB) and Google parent Alphabet Inc. (NASDAQ:GOOG).
“The recently weak price action in big-cap technology stocks has taken up a lot of media attention. likely due to the heavy technology weighting in broader indexes. I thought this might be an interesting time to discuss potential levels of support, after noting the PowerShares QQQ Trust’s failure at the $142 resistance level around this time last month,” according to Schaeffer’s Investment Research.
Technology companies are still sitting on cash hoards that can be deployed in ways to improve value with investors. We are already seeing an increase uptick in company share buybacks and tech firms are now even issuing dividends. Meanwhile, the industry continues to grow through innovation as more shift to cloud, progress into artificial intelligence and adopt internet of all things devices.
While earnings multiples on tech stocks have jumped this year, investors should not expect another tech bubble on par with what was seen in 2000. In fact, the largest tech stocks today are far less pricey than their counterparts were in 2000.
“Today’s “Power Five” trade at an aggregate of 30 times trailing earnings. That compares with an aggregate of 78 times trailing earnings for the five largest tech stocks in March 2000. This difference equates to total valuations for the five largest technology firms that are 60% lower than they were 17 years ago,” according to research from PowerShares.
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A key technical level is at play for QQQ that investors should be mindful of.
“The QQQ comes into the week trading just above the $136 level, which marked a bottom in May, thus setting up the potential for a “double-bottom” pattern to emerge. The $136 level is also home to its 80-day moving average, a technical level that is not widely tracked among traders. But we have seen this trendline mark support in enough instances that we pay close attention to it,” according to Schaeffer’s.
For more news and strategy on the Technology market, visit our Technology category.
Tom Lydon’s clients own shares of Apple and Facebook.