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Tech, Where Hast Thou Gone?

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No other industry sector has more innovation per square foot than technology. And for most of 2012, Apple along with the rest of the technology sector was outperforming. But not anymore.  

One of the stock market’s most beloved leaders is now a laggard: Apple. The mood has quickly turned from optimism and euphoria to anxiety and fear. 

When Apple broke below $564 on Nov. 7 everything changed. It marked an official 20% bear market decline in the stock from its $705 high and “Apple-mania” began to fade. 

Just a few months prior to Apple’s fall, here were the rosy headlines: 

“Wall Street Analysts Increasingly Bullish as Apple Hits Fresh Highs.” — Wall Street Journal, 8/27/12.

“Apple seen as ‘trillion dollar baby’” — MarketWatch, 8/21/12

“Apple could be worth a trillion in one year” — The Atlantic Wire, 9/23/12

Tech Impact

News headlines from our friends in the media turned out to be a great contrarian indicator. Is the run in technology stocks over?

Sector leadership (or lack of it) is an important factor for the broader stock market. In 2000-02, the technology sector (QQQ) led the market lower. During the 2008-09 credit crisis, bank and financial stocks (XLF) sank the market.

What’s the point? Industry sectors that contain stocks with large market capitalizations (size) always dominate the performance and volatility of major indexes. Today, the 78 technology stocks within the S&P 500 (IVV) represent a jumbo sized 22% of the index. 

And if we drill down into the top 10 holdings of popular technology ETFs like the Technology Sector SPDR (XLK), the concentration in just a handful of stocks (65% of the fund) gets extreme. Market concentration is wonderful when stocks are rising, but when they fall—the damage is felt. 

What about the market’s mood?

Investor sentiment, especially toward old tech giants has soured considerably. Hewlett-Packard (HPQ) shares hit 10-year lows, Dell is at three-year lows and Intel’s share price is down close to 20% since mid-2012. From a contrarian perspective, opportunistic investors like Warren Buffett have been adding to their tech positions. Buffett owns shares in both IBM and Intel. 

Because technology is such a large sector component, it will be difficult for major indexes to stage a sustainable rally without its participation. Smart advisors do the opposite of the crowd by building positions when everyone has seemingly left the building. That could be the story with tech this time around.