This weeks sector deep dive will take a look at the tech sector. Tech is looking very overpriced in terms of PEG ratio and is lagging the market on the daily RRG, with a wide set rotation into the weakening. This could lead to potential opportunities in the coming months however for the time being we want to be sure we are aware of downside risks and levels of interest if we can rebalance in the market.
RRG, Daily, SP500 sector ETF's
Heat Map of Sp500 stocks / sectors filtered by PEG ratio (price - earnings - growth)
Tech sector (top left) shows how high the PEG ratios are, with ratios below 1 representing value in the market, the majority of the sector is highly priced and red. This doesn't mean to say there are no opportunities but we are going to take a look at the key players and the potential downside risks.
SPDR Tech sector (XLK)
The sector ETF is showing early signs of weakness following on from MACD divergence, and now a 'sell signal' accompanied with a downturn in the stochastic, the momentum against the market looks relatively weak. A move back to all time highs would only realise a 16% upside gain with therefore the previous swing low must act as support in order to offer an acceptable risk; reward ratio.
Strategy:
Await exhaustion / pullback on momentum indicators before entering new positions to challenge the January high around $177.
The risk of a wider move lower remains valid give the overpricing in the market and the sector rotation.
Stop losses would be justified below the swing low $133 which would give a risk:reward of 1.5;1 to revisit the all time highs.
Microsoft (MSFT)
We appear to have found a base for the short term around $214 and followed through with a breakout shifting the short term trend upwards. However, MACD is showing a 'sell signal' coupled with a downturn in the stochastic.
Although the long term outlook for Microsoft remains strong with heheh advancements in AI and strong financial and market position, I would remain cautious of a wider retracement in the short to intermediate term as the upside gain to all time highs does not justify the potential risks of another leg lower.
Strategy:
Moves towards the highs of December 2021 (+21%) should be protected with a stop loss below the previous swing low at $242.
Remain patient in the short term for a favourable price entry upon any prolonged pullbacks that have the potential to occur throughout Q2/ Q2
Or use any sell offs as an opportunity to cost average with a time horizon of 12 -24 months
Skyworks Solutions
(daily, MACD, Slow Stochastic)
According to the PEG ratio of just 1.06, skywards solutions is one of the most undervalued stocks in the tech sector. Technically we are seeing the early signs of a trend shift with new formations being formed. As stochastic have rolled over from oversold , the price has only managed to consolidate drifting lower with little intent.
For the time being the tech sector is rotating into the weak sector of the RRG but SWKS has remained stable in its pricing. The fundamental plot is not as clean as some, but the trend is visible none the less and it shows us the correlation of market price and operating cash flow, showing us the most recent dip could be considered a good opportunity to buy in line with the overall trend.
Finally, SWKS reports strong financial positioning (current ratio, quick ratio, PE ratio, debt/equity) using as the metrics. They also have a diversified customer base and are a market leader in wireless communications.
Strategy:
Core long positions until the market signals otherwise with sights on previous highs at around $92 (+85%).
We don't believe it is wise to leverage this position beyond 2x as the weakness in the sector could still drag the market lower before changing direction
NIVIDIA (NVDA)
Given their involvement in AI, it's not surprising NVDA is rallying as it is, in fact we mentioned it in a deep dive around 8 weeks ago and flagged it as a BUY.
It's not to say the rally is over but to optimise the risk; reward ratio, it would be wise to wait for any signs of relief. There is a gap fill around $215 that would be ideal although it seems a long way down given the bullish momentum.
Strategy:
Hold core long positions into new highs (above $342)
Use any pullback as an opportunity to scale into new positions (preferably above $215) other wise the threat of a deeper pullback may materialise
Apple is amongst the most overvalued companies in the Tech sector with reference to PEG ratio, and with good reason. However, although we are talking about one of the worlds largest companies, it is difficult to find value at nearly all time highs.
Technically, we are approaching all time highs again around $180 where I would be cautious of a relief given the overvaluation. Momentum indicators are showing signs of slowing with divergence building on both the MACD and Stochastic oscillator, finally breaking down out of oversold.
Strategy:
Consider taking profits off the table, perhaps partials, and stay observant for a downturn from $180, with hedges or stop losses in place below the previous swing low around $141.
If the market breaks out of the highs, this would give us new optimism price will push onto into new grounds.
If you have any questions regarding any of these trade ideas, be sure to get in touch and we will be happy to assist. Trade safe.
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