Tech Stocks: The Perfect Storm, or Market Bubble?

  • This year, the Powershares NASDAQ 100 ETF has posted rallies of nearly 30%.
  • The performance has roughly doubled the 15.5% gains seen in the S&P 500.
  • But the broader trends in the tech-heavy ETF remain supportive for further gains over and above these recent rallies.

The stock market rallies of 2017 have been kind to those invested in tech, and the Powershares NASDAQ 100 ETF is now showing gains of nearly 30%.  For growth investors looking for value in these elevated markets, this complicates the risk-reward picture when establishing new positions in the sector.  

But when we look at the combined factors of dovish interest rate policy, strong consumer spending, and a declining US Dollar the proverbial ‘perfect storm’ is now in place for further runs higher.  For investors not already long the ETF, buy entries can be established on a drop back into the 146.90 level as a way to gain exposure and limit the potential for downside risk.  

Perhaps the primary driver of corporate earnings in the tech sector can be seen in the massive upside gains that is been posted in the US consumer spending data since 2015.  The economic trends here are clear, as the upside trajectory has been sustained and unwavering.  This puts the collective names in QQQ in a good position to post upside surprises in earnings well into 2018.

But those trends could be replicated at the global level as well.  In the chart above we can see that the tech sector draws a significant percentage of its sales from foreign sources.  Declining values in the US Dollar will only exacerbate these trends, as the weaker currency makes US products cheaper to foreign consumers.  The information technology sector draws roughly 58% of its sales from foreign sources, and we can use the Powershares US Dollar Index to assess the trend direction in the currency.  

UUP is currently showing year-to-date losses of 7.3% and this is even after the ETF has shown something of a bounce to correct recent breaks of critical support levels.  UUP tracks the US Dollar against a broad range of commonly traded currencies, and this activity suggests that the weakness in the greenback will make it easier for consumers in a number of different geographic locations to buy products from US tech companies.

QQQ Holdings: Morningstar

To identify some of the specific names that should be watch when assessing the likely direction of QQQ, it is important to look at some of the ETF’s largest holdings.  In the chart above, we can see the names that make of roughly half of its exposure.  A central theme here can be found in the fact that these are companies that will benefit from rising consumer spending and weaker currency values as the ETF’s exposure to the IT space is relatively clear.

AAPL Chart Analysis:

When examining the individual holdings of the QQQ ETF, the largest contributor by a fairly large margin is Apple, Inc. (AAPL).  The stock makes up more than 12.5% of the ETF on the online trading platform and its recent activity points to a strongly bullish outlook as we head into next year.  

Critical resistance points near 165 were overcome in September and given the current proximity to the holiday season, there is scope for further gains once the oversold indicator readings have a chance to work themselves into more normal territory.   Downside risk should be limited as long as the prior resistance areas (now viewed as support) near the 165 level remains intact.

MSFT Chart Analysis:

The technical picture in Microsoft Corp. (MSFT) is even more bullish, as the QQQ ETF’s second largest holding (at 8.95%) has made a clear topside break of its daily uptrend channel.  Propelled by sustained earnings surprises, the stock’s recent gap higher does pose some risk until it is closed but as long as there is now downside violation of the uptrend line from July 2016 the bull rally should remain alive and well.  

CCI indicator readings have already returned to mid-levels so there is plenty of topside potential above the 50-day exponential moving average (which is now seen near 81.  On balance, this is a solid combination of fundamental macro drivers and technical momentum that shows no signs of slowing at current levels.  This makes QQQ a ‘buy’ even with the above-average rallies that we have already seen in the early parts of this year.


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