MorningWord 4/28/16: Social Distortion – $XLK

by Dan April 28, 2016 9:55 am • Commentary

Last night on CNBC’s Fast Money, my main technical man, Carter Braxton Worth, of Cornerstone Macro Research (and co-panelist on Options Action) laid out a fairly compelling case for a short entry in the XLK, the S&P Technology etf, watch here:

The main chart I want to focus on is the two year, with the recent rejection at high at the top end of the trend channel:


Regular readers know that Carter and I are in the same camp. I laid out my bearish intermediate term view on Friday’s Options Action and here on the site (here & here), but want to give the view some time to play out:

I’ll just say it, cause I know you are thinking it, those two guys are good looking. And they have fairly complimentary views, albeit one technical and one fundamental.  Which leads me to Facebook (FB), the third largest weight in the XLK, at just above 6%, trading up more than 10% in the pre-market. It is a total outlier, as it is one of two the top 10 holdings (9 have reported, waiting on CSCO) that has traded higher after earnings and more importantly has not missed the current quarter or guided down, all others have (except AT&T). The top 10 holdings make up about 65% of the etf’s weight:

From Bloomberg
From Bloomberg

Facebook’s price action, and eye-popping 52% year over year revenue growth don’t change my view that tech stocks may have a long spring/summer. FB and GOOGL are unique amongst this group as they make their money selling ads on their tech platforms (and others’), their core product is free.  And FB in particular is eating up ad budgets in one of the largest secular shifts in advertising since GOOGL in the early aughts and possibly TV before that, a half a century ago.

Of course tech shares as a whole may be merely taking a pause, and the rotation out of large cap tech into sectors that got destroyed last year, energy, materials and industrials is actually a healthy thing. I get that, but let’s not forget that the only sectors that have really beaten expectations so far for Q1 results are the ones that had low expectations. And S&P 500 earnings are sill going to be down year over year, their 4th consecutive quarter of declines. I remain in the camp that committing new capital to equities at this juncture offers a poor risk/reward, regardless of how low for how long you think interest rates remain.  So let’s not let FB distort the reality that the ingredients that made the bull market so palatable for investors seeking return during QE & ZIRP may no longer offer the same risk reward profile at this stage of the game.