Thursday, June 21, 2007

Time for Tech? UPDATE

[This post is a follow-up to one I made nine weeks ago, Is It Time to Buy Tech? -- dk]

Still haunted by the epic dotcom crash of 2000, traumatized investors tend to have a near-Pavlovian response to the thought of being overweight in technology stocks.

While this is understandable, the avoidance may soon include an expensive opportunity cost. Tech stocks aren't voodoo -- they're cyclical like everything else -- and there are important signs that a new, cyclical tech Buy signal is in the process of confirming.

Today, the Tech Ratio broke above 10-month resistance to hit a new, 18-month high. This is an important development, and is an extension of a rally off the cycle low in July 2006.

The Tech Ratio is a metric of my own creation that uses the Dow Jones US Technology Index ($DJUSTC) and the NASDAQ. The DJUSTC contains 212 component stocks pulled from all tech sectors and across all market-caps. Because of this breadth, I prefer it to other popular numerators, such as the NDX (70 large-cap-only techs), IXCO (an scduo4fun favorite) and XCI (a Dr. Brett favorite). It's worth noting that the NDX, IXCO and XCI are all giving similar confirmations.

The Tech Ratio appears to have put in a 7-year cycle low this past July. This low was confirmed with a higher low in Apr, and today's 10-month resistance breakout.

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The 7-year Tech Ratio chart below shows that while the broader stock market hit bottom in 2002, tech languished far behind for the next 5 years, further burnishing its negative reputation. After bottoming in July 2006, the Ratio is now making a convincing case for a 3-year, inverted H&S. A break above 18-month resistance at 0.238 (dotted line) triggers the cycle Buy signal.

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The Tech Ratio confirms that technology is slowly accelerating past the broader market. It's impossible to know exactly when the cycle Buy signal will occur, but it's logical to assume that it will have something to do with strong earnings.

The evidence says that after a 7-year drought, now is a great time to begin a technology shopping list.

best

dk

8 comments:

Robert said...

DK,

This was an excellent post and I imagine it will turn out to be a prescient call.

Tech Bubble 2.0 here we come! I have got my '09 LEAPS!

Seriously, the Nasdaq and the QQQQs are great candidates to get near the bubble levels due to the decline of the dollar from that time and the fact that these companies actually have earnings now! The public's revulsion of tech will eventually end and, strange as it might seem, people will be falling all over themselves to buy it once the fear of the bubble fades. Who knows. We certainyly have a few interesting years in store.

Keep up the good work.

dk said...

Thanks, Robert. The PE contraction you noted will be a big driver for this new tech cycle. Currently, the market isn't rewarding growth or technology, but that will change in time. Best of luck.

Babak said...

Nice work!

how much of that is the SOX powering higher?

Babak
tradersnarrative.com

Bill Luby said...

Great stuff, dk. Just out of curiousity, has your tech/commodities ratio indicator recently fallen out of favor? I don't remember seeing it in a while, yet for a stretch it seemed to be a good tell.

Cheers,

-Bill

dk said...

Hi Babak...semiconductor density on $DJUSTC is a great question. The component list I use isn't sorted by sector. However, looking around, tech accumulation was broad-based on Thursday. All seven tech subindexes I track closed positive, and Chips and Networking hit new highs. Hope this helps, and thanks for stopping by.

dk said...

Hi Bill...Thanks for asking about the tech/commodities ratio. It's been moving higher with the others, but higher oil has it lagging and still below its Jan high. That said, DJUSTC hitting new highs without the help of cheaper commodity prices is a probably a bullish development for tech stocks.

Chris said...

Dk,
Excellent work. The 18-month signal may come just in time for the end of the summer tech buys that typically take place. It will be very interesting to watch in the coming months.

-Chris

Yaser Anwar said...

It would be great if you could update this- but good post overall. Thanks. Y