Breakout From Bullish Pattern
Regular readers know we are not big fans of forecasting outcomes in the financial
markets. However, assessing investment probabilities based on evidence we have
in hand is a value-add exercise. One way to monitor the probability of success
is via chart patterns. The chart below shows the performance of technology
stocks (QQQ) relative to the S&P 500 (SPY). The pattern, known as an inverse
head-and-shoulders pattern, tells us the probability of good things happening
in tech stocks is higher today than it was prior to the push above the blue
neckline in the chart below.
More M&A Could Be Coming
When cash begins to pile up on balance sheets, mergers and/or acquisitions
become viable options to gain a competitive advantage or improve efficiency.
Technology companies have a fair amount of cash to spark additional M&A
activity, which adds to the appeal of the tech sector. From Street
Insider:
Goldman Sachs increased its price target on Yelp (YELP), WebMD Health
Corp. (WBMD), TrueCar (TRUE), and Demand Media (DMD). Changes reflect rising
potential for M&A. Analyst Heath Terry said potential for additional
M&A is increasing given high cash balances, increasing disparity in
valuations, and growing benefits of scale.
The Big Picture
Since the NASDAQ and S&P 500 are highly correlated, it is prudent for
technology investors to keep an eye on the broader market. This week's stock
market video looks at recent improvements in the stock market's risk-reward
profile.
Tech's Achilles Heel?
Longer-term, the technology sector will have to deal with a familiar concern
about the global labor force. From CNBC:
One of the major hurdles revolves around skills and access to talent.
In every technology sector around the world, a shortage of talent needs
to be addressed for the industry to fully flourish. Why? Firstly, we rely
on tech talent as a source of innovation and ground-breaking, disruptive
ideas. Secondly, we need a skilled tech industry to ensure those ideas
fulfil their potential, scale-up and change the world.
Internet stocks have been providing leadership in 2014, but longer-term the
industry could run into a shortage of skilled workers.
Investment Implications - The Weight Of The Evidence
Monday's lackluster trading session did little to alter the market's appetite
for risk. Therefore, we continue to hold a portfolio of U.S. stocks (VOO),
leading sectors (XLK), and a relatively small and offsetting exposure to bonds
(TLT). The chart below shows the tech sector recently completed the three
steps needed for a bullish trend change relative to the S&P 500.
