Tech investors gearing up for year-end rally

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By Don and Jon Vialoux, Financial Post
According to Thackray’s 2010 Investor’s Guide, the period of seasonal strength for the technology sector is from Oct. 9 to Jan. 17. The S&P information technology index has gained in 15 of the past 20 periods; the average gain per period was 10.4%. The seasonal strength is related to favourable news on consumer electronic sales during the Christmas gift-buying season. The marketing of the latest consumer electronic goods creates an encouraging atmosphere for consumers and investors.
The period of seasonal strength typically ends during the Las Vegas Consumer Electronics show in the second week in January. That’s when manufacturers showcase products they expect to market during the next Christmas season. Investors tend to sell on news.

What about this year? Lots of positive “buzz” is expected from electronic manufacturers this year due to the recent launch of exciting new products. Apple Inc. launched the iPhone 4 earlier this year and is expected to announce an upgrade before the end of the year. Apple’s iPad is expected to be a big seller this Christmas season.

Research in Motion Ltd. has been successful with several of its new BlackBerry products. Next week, RIM may launch the BlackPad, a direct competitor to the iPad. Television sets in 3D are the latest new product to receive interest from well financed consumers. Microsoft Corp. recently launched the latest in the series of Halo video games just in time for the Christmas season.

Growth this fall also will come from enterprise software sales. Microsoft launched Windows 7 last fall and upgraded its Office suite. Major corporations recently have launched plans to upgrade their software in 2011. The process is to commit to software purchases in the fourth quarter with the intention of upgrading technology as part of their budget in 2011.

Another positive influence on the sector is the expected investment of its large cash holdings. The top 10 companies in the industry, led by Apple, Microsoft, Cisco Systems, Google Inc., Intel Corp. and Oracle, hold more than US$222-billion in cash equivalents. Investors are pressing these companies to participate in mergers and acquisitions, increase dividends and/or repurchase shares. Last week, Microsoft and Intel announced dividend hikes.

A word of caution: Analyst estimates for third-quarter earnings and revenues are too high. Technology stocks are vulnerable to a correction between now and the release of third-quarter results in the second half of October. Downside risk in the short term could be significant.

This week Adobe Systems Inc. fell 21% and PMC-Sierra Inc. dropped 7% after reporting strong quarterly earnings in line with consensus, but also offered guidance that was below analyst estimates. Timing of entry into the seasonal trades this year is more important than usual. Chances are high that the technical entry point this year will happen after Oct. 9.

On the charts, momentum indicators for the S&P information technology index currently are overbought and have started to roll over. The preferred strategy is to wait until short-term momentum indicators become oversold prior to the earnings season before entering the trade.

The easiest way to invest in the sector, when timing is opportune, is to own the Technology Select SPDR Fund (XLK/NYSE). Units track the performance of all technology stocks that are part of the S&P 500 Index.

Read more: http://www.financialpost.com/Tec ... .html#ixzz10a0VI4Zh

mayoutu

To wait until ER season makes sense