New Trade – QQQ: For Technology Shares… Winter is Coming.

by Dan July 9, 2012 10:00 am • Commentary

Ok, the title may be a little dramatic. But for those of you who are fans of the Game of Thrones books by George R.R. Martin, and brilliant HBO series will recognize that as the saying of the House Stark.  The saying is one of warning, that those who have been complacent in the Long Summers do not take seriously.  For those who have grown complacent the saying is like that of the boy who cried wolf, but for those who are vigilant they will be much better prepared.

Frequent readers of probably would agree that we are in the “Winter is Coming” camp, not that we are fear mongering, but more that we been through our share of Winters in our careers, and the Summers, well, most of the recent ones have been stimulus or bubble induced.

We don’t like tech here, and think as I wrote in the MorningWord,  I think tech shares have the potential to be a big trouble spot for equities this year, especially if the recent weak data from China to Europe to the U.S. proves to be more of a global recession.  In an effort to not be too redundant, here was my little rant from earlier:

MorningWord 7/09/12: As Enis mentioned in this morning in his MacroWrap, volume was anemic last week, and aside from the move in the Euro/USD (making fresh 52 week lows), there wasn’t a whole heck of a lot to write home about, Except the almost 30% collapse of INFA  (31.39 ↓-27.62%) in Friday’s trading.  INFA is a $3.3billion infrastructure software company that had a little less than $800 million in sales last year, with 25% of those sales coming from Europe.  The company stated on a conference call Thursday that “customers in Europe had an increasingly cautious tone”.   Whats most significant about the miss is that investors extrapolated European weakness to some very large software companies like SAP, CRM, CTXS  (77.45 ↓-7.56%) and VMW, with all of them down btwn 4.50 to 7.9% on big volume.

INFA taken with warnings from STX in the hard disk drive space and APKT  (15.74 ↓-14.46%) in the networking equipment space on Thurs/Fri shed a fairly dim light on Technology shares on Friday with defensive meg caps like IBM  (191.41 ↓-1.99%) taking it on the chin down 2%, badly under-performing the broad market.

Unmistakably, large cap tech has been a bit of a safe haven since the Oct 2011 lows due to their decent dividend yields and their generally defensive nature, while financially related stocks remained in focus, but a slowdown in China and a recessionary environment in Europe would likely cause massive under-performance in this very cyclical sector.  The tech sector has the potential to be  ground-zero for any market rout of 2012, as financial shares (particularly banks) are generally in shooting distance of last years lows, many tech stocks, like INFA, could take a 20% plus plunge to make those lows from last year, while many are still up 20-50% from the Oct lows…….I’m just saying, not fear mongering……but if I had lots of gains in Tech shares I would be pouring through the press releases of last week’s pre-announcements to make sure they were not just “company specific misses” as the Wall Street bulls love to label early cycle misses before a trend is confirmed.  We would never expect Wall Street analysts to be ahead of the trend.


Also last night in the Trading Diary I had some comments about the absurdity of the notion of an imminent PC upgrade cycle that Tech bulls point to with the impending release of Windows 8 from MSFT:

With GOOG and MSFT both recently announcing tablets to compete with AAPL  (605.88↓-0.67%)‘s iPad and AMZN‘s Kindle Fire, I am hard pressed to think that the coming PC cannibalization will be kind to chipmakers like INTC  that seem to be struggling with design wins in the category.  Additionally, bulls point to the supposed impending “PC upgrade cycle” spurned by Windows 8 from MSFT in OCT that is going to lift sagging PC sales.  I don’t buy the notion of PC upgrade cycles, I bet most people who tap on their pc to see what version of Windows that they are running will likely find that it is not the last version MSFT introduced.  The point is, while MSFT is hailing Win8 as huge step forward, it is likely to be, and PC buyers have not be holding out for the next genius product from the genius innovators and marketers at MSFT.

Ways To Play:

Obviously I want to be short tech, but AAPL remains the wild card as they head into the fall with the expected release of the next iPhone.  AAPL shares just started to run towards the previous highs and in some ways regaining a bit of that “safe haven” status.  But let’s try to separate the forest from the trees a bit, I am not going to go after AAPL. I tried that a few times earlier this year and that proved to be near fatal.  But I will look to ETFs like XLK where the top 5 Holdings make up nearly 50% of the ETF’s weight.  The problem is it is filled with defensive names like AAPL at 20%, MSFT & IBM at about 8% and T & VZ that make up almost 12%.  The premium in the XLK looks deceiving (meaning dollar cheap), but the index really doesn’t move unless you get a fairly large move in either AAPL, or the broad market where we have a big risk-off move, meaning everything gets hit.

QQQ is probably a better vehicle for broader exposure, while AAPL still makes up about 20% of the index like XLK, it does not have all the telecom, and a few other defensive names like Visa in the top 20 holdings.   QQQ is some hard core large cap tech with a little Biotech thrown in.

MY TRADE: QQQ $63.93 Bought the Aug 63/60 Put Spread for .70
  • Bought 1 QQQ Aug 63 Put for 1.20
  • Sold 1 QQQ Aug 60 Put at .50

Break-Even on Aug Expiration:

  • Profits btwn 62.30 and 60 make up to 2.30, max gain of 2.30 at 60 or below , that would be a ~6% move lower in the next 6weeks.
  • Losses of up to .70 btwn 62.30 and 63 and max loss of .70 at 63 or higher on Aug expiration.


Trade Rationale:  The Nasdaq massively outperforms almost every index the world over, and if you think, like I do, that “winter is coming” and sooner than most think, a 50% retracement of this years gains in the Nasdaq during the bulk of earnings season could easily be in the cards.