Semiconductors broke support and investors should take note of the event. The chart below of the PHLX Semiconductor Index (SOXX) broke lower from the symmetrical triangle. The catalyst came from a downgrade on the sector from analysts. The follow through on the downside was a combination of earnings and analyst meetings.
If earnings disappoint in this environment, the punishment is severe. If companies don’t say the right things in a investors' meeting, the punishment can be severe. The ripple effect through the technology sector is tops on our watch list. Some stocks are priced for perfection, and anything less has resulted in selling. This push lower has triggered out stops on the sector, but the question remains: Is this an opportunity to buy following the initial selling?
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Two ETFs to watch relative to the current ativity in technology are SOXX and iShares S&P GSTI Networking Index ETF (IGN). The networking sector saw Finisar (FNSR) drop more than 38% yesterday, as it disappointed on guidance relative to earnings. IGN fell 3.8% in relationship to the news hitting the sector overall.
The chart below shows the damage technically to the sector on the downside. However, IGN did find support and held above the current trendline.
All the negative rhetoric aside, the selling may provide an opportunity in the sector as the stocks hit by the collateral damage may bounce back. Oclaro (OCLR) and JDS Uniphase (JDSU) are worth watching in the networking space to recover losses as a result of Finisar earnings report and the sell off. Both have been leaders in the space and are fundamentally sound.
The chart of IGN above shows what is known as a double top pattern in technical analysis. A break of the existing uptrend line (purple) and support would complete the pattern with a break lower. That would be a negative short term for the sector. Watch for support to hold and the uptrend to continue providing opportunity to invest short term.
The short-term sentiment is negative for the technology sector based on the current activity. However, the underlying data remains fundamentally solid and positive. Earnings have been growing, margins remain strong and inventory control has been good. Corporate spending has risen the last two quarters, and are projected to continue to do so.
The case against the sector is based more on what analysts aren’t hearing and, in the case of Finisar, not providing guidance that meets analysts' expectations. The reactions have been more on perception than reality. If the fundamental improvements remain, the result will be a buying opportunity. Thus, the reason to keep focus and track the resulting opportunities.
If IGN holds support at $35.73, there will be opportunity to invest in the sector short term. The same is true for SOXX and support at $58. If the data is wrong and fundamentals disappoint going forward, building the negative sentiment, support will give way to more downside and selling.
Watch for the bounce off support and the fundamental data to remain upbeat to provide entry points in both ETFs; if they fail the test or break the trendline, you pass. But if they do hold support and resume the uptrend, you have a clear point of entry to add them to your portfolio.
The technology sector is a key element for the broad market to maintain its current trend to the upside. If semiconductors and networking break lower, the sector overall will likely follow suit.
Disclosure: I am short SOXX.
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