Should We Be Worried about Technology and the Nasdaq Here ?

Lots of angst around the QQQ’s and the “head-and-shoulders” that looks to be in place (according to some technicians).

The June 8th reversal for the semiconductor sector and the QQQ’s was significant.

Here is how the Q’s and some key Technology holdings fared in June ’17:

  • QQQ’s: returned -2.70% in June ’17. (Long)
  • Apple: returned -.5.98% in June ’17 (Long)
  • SMH (semi ETF): returned -4.98% in June ’17 (No material weights)
  • QQQE returned -1.94% in June ’17 (long)

Apple is 11.5% of the QQQ’s market-cap weighting, so as Apple goes so goes the Q’s, to a large degree and even the Sp 500 as Apple’s weight in the SPY is the single largest position at 3.6%.

However, there was no question that the selling and key reversal’s that started June 8th and 9th, started with the semiconductor group i.e. Nvidia, et al.

As of June 30th, Technology led all 11 sectors of the SP 500 in terms of YTD returns:

  • Tech: +16.6%
  • H/Care: +15.2%
  • Cons Disc: +10.1%
  • SP 500: +8.3%
  • Indus: +8.1%
  • Basic Mat: +7.8%
  • Ute’s: +7.6%
  • Cons Spls: +6.7%
  • Fincl’s: +6.0%
  • R/E: +4.6%
  • Telco: -13%
  • Energy: -14%

Source: Bespoke Research

More than doubling the SP 500’s YTD return, Tech and Large-Cap and Growth are the clear leaders this year after lagging the small-cap asset class last year. (:Last year the Russell 2000 was up over 20% and the Nasdaq and Nasdaq 100 rose just 6% – 7% for calendar 2016. The opposite has happened this year.)

So I’ll ask again  – rhetorically – is this just a temporary correction in the Tech sector, or is something more sinister afoot ?

Let’s go to the earnings estimates:

FC – TechandFincials63017

Study this Excel spreadsheet for a minute:

1.) Note how there has been no erosion in forward Technology estimates for Q2, Q3 and Q4 ’17. That does NOT mean there isn’t a negative surprise in the sector awaiting investors, it just means that – even with the corrections within the Q’s and Technology – there is no downward pressure YET on forward growth estimates, at a time where we typically see downward pressure on forward estimates.

This isn’t about precision – it’s about probability, and what the patterns of the numbers tell this Rain Man is that Technology earnings should be fine into year-end 2017. (Based on updating this data every weekend for nearly 17 years, that is my “reasoned conclusion” and in fact it could be wrong.

2.) Note the year-over-year growth estimates for the Financial sector in Q4 ’17 – that is telling me we could have a strong 2nd half or Q4 ’17 rally for the equity markets. It also tells me we could get a cap gains tax cut or some other “market-friendly” action that would impact Q4 ’17 Financial sector earnings.

In q4 ’16, the Financial sector grew earnings 11% on 4% revenue growth, so despite a tougher compare, Q4 ’17 is still looking strong, BUT we’ll have to see what happens to the Q4 ’17 Financial sector estimates / data as we move through the 2nd half of ’17.

Our recent call on the Financial sector on this blog when pessimism was quite elevated, was pretty timely. Here are the blog post from just a few weeks ago (here and here).

Bottom Line: nothing in the earnings data tells me Technology is having anything other than a normal correction since June 8th, 9th, 2017. A separate post on Apple will be forthcoming in the next few days. Apple is such a big part of the market, its importance can’t be exaggerated.

Clients remain overweight Technology and Financials heading into Q2 ’17 earnings results and the back half of 2017.

Thanks for reading.

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