Dear Bottarelli Research Reader,
This week, we’re going to discuss another “Wall Street Fraud.”
If you recall, we broke open a homebuilder’s ETF last week and discovered it had precious few builders left in it.
This week, we’ll look into what’s keeping a major tech ETF afloat – and what you can do to profit off it.
You see, as I went searching for a telling item for the this week’s lead, I noticed a peculiar habit of online articles that’s a perfect representation of tech’s little frauds.
Most Web sites want you to spend as much time as possible clicking through the site, so you’re exposed to the maximum number of pages – and ads.
Side Note: This is a habit we strive to avoid here at Bottarelli Research. For instance, we’ve actually had outside Web consultants tell us that we make it far too easy for our readers to find out what they want to know. They also scolded us for not collecting extra revenue by littering our site with ads. We thanked them for their advice, then fired them.
Sure, Bottarelli Research Newsletters will contain an advertisement (like the one you see below), but we feel our ads offer you benefits that increase your user experience – as opposed to tricking you into clicking something you don’t really want in the first place.
For instance, just look at the gains we’ve made so far this week in the various Bottarelli Research services, then match those gains to your own personal investing style. That way, the benefits of belonging to our trading group becomes crystal clear.
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Despite our streamlined model, the commonly held idea is that the more clicks a site receives, the more supposed viewers it has – and thus the more they can charge outsiders for the placement of ads.
So, the idea is to break up all the critical information into as many separate pages as possible, forcing the viewer to click repeatedly to get to the meat of a presentation.
But while these clowns may be able to increase their raw stats and fees, they’re really just wasting your time, ticking you off, and making you much less likely to buy something at the end of the day.
I’ll come back to tech’s frauds and fakers in a moment – as soon as we run through our latest Dow Jones Industrials (DJIA) chart.
The Current Situation
The DJIA is still giving us sell signals across the board…
- This week is offering up the third red candle in three weeks. Right now it is a “Doji” or “Spinning Top,” which closed just a hair below open after a failed upside effort and a probe to fresh lows.
- Volume is still weak. That’s not good, but it is pretty typical of the weeks before Labor Day.
- MACD’s Sellers Cross is now quite clear and quite ominous. The last time we saw this signal, the Dow dropped more than 7% before a bogus retail report rescued stocks.
- A/D is now indicating some serious net share distribution for the first time all summer.
Lots of investors are chatting about “how awful” the last few weeks have been — “worst since…yadda yadda.” But in their hearts, they know they ain’t seen nothing yet…
For instance, this whole episode still only represents a -2.2% loss top to bottom.
But remember, a true retracement is usually between -10% and -15%.
If the Dow does nothing more than drop to support at the 38.2% retracement marker at 14,429, it would still only be a net loss of some -7.9%. Is the tumble heading further south? The signals are all saying yes.
What is This ETF Hiding?
This week, we want to look at the Technology Select Sector SPDR (XLK – NYSE), starting with its 5-year weekly chart – which reveals that this sector is up some 175% since the bottom of the 2008 to 2009 collapse.
But, what is “Tech” anyway?
It used to represent young, up-and-coming companies focused on leveraging technological innovations. Because clearly, you have growth here.
But are all these companies really in the same business?
And, are they all growing?
Or, is this ETF just using the success of some components to cover up the troubles of others?
The XLK’s top three companies by weight are Apple (AAPL – NASDAQ), Microsoft (MSFT – NASDAQ), and Google (GOOG – NASDAQ) – all iconic companies for sure.
But, they’re certainly not start-ups anymore.
Apple and Google are best thought of as ecology crafters, much like Amazon (AMZN – NASDAQ), really. Apple’s hardware is certainly cool, but the big money is on how it feeds you back to iTunes and the like.
Google went about it the other way, with software first, feeding into hardware.
And Microsoft actually invented the idea of a monopolistic software kingdom, but it trusted that monopoly to force the sales of ever-lousier products. It has never successfully broken into branded hardware, mostly because its efforts have been slow and weak.
The Telling Details
Let’s take a second look at that XLK chart (below), this time in more detail. Then, we’ll compare the top three components – and I think you’ll see something extraordinary.
First of all, even the mighty XLK is capable of putting in a serious retrenchment – witness the -14.3% drop last October and November. And lately, we’ve had a series of scares as investors wonder if perhaps the sector is more than a little overbought?
Now let’s take a look at AAPL…
Ever the trend leader, AAPL experienced its moment of doubt back in September 2012 when shares finally began to roll over and unlock all those idle billions.
This was certainly a boon for the rest of the sector, as AAPL investors looked for some place to park their cash.
But now, AAPL is looking like a buy again. We can see a double bottom and two buy signal stacks this spring and summer leading to some rather impressive gains. (In fact, Bottarelli Research LEAPS members have already enjoyed 68% gains on AAPL calls back in July.)
Right now, AAPL is stalled at the collision point between the old falling trend and the new rising trend. If it can’t beat this barrier, shares will almost certainly tumble back toward $450.
And unfortunately, if AAPL does break out, these gains would almost certainly come at its rivals’ expense.
When we look to GOOG’s chart, we see a very similar chart to the larger XLK – a 3x Sell Signal Stack back in July driving price down to a support test at the bottom line of the rising trend.
GOOG faces two threats right now that could break that support.
Within the sector, investors could move cash back into AAPL, attracted by AAPL’s superior growth prospects. Or, a broad market fall-off could cut deeply into the advertising revenues GOOG is still heavily dependent on.
Either way, the first tumble would see GOOG drop to the 38.2% retracement marker at $786.83.
And then, there’s the once mighty MSFT, whose latest operating system is still dull and latest effort at a tablet is failing yet again.
This is, I suppose, what happens when you put the former head of Proctor & Gamble (PG – NYSE) in charge of a tech company. Advanced software and hardware simply isn’t laundry soap.
Chart-wise, MSFT put in a Double Top – and a massive downtick – which formed a clear 3x Sell Signal Stack.
MSFT has already broken down through the first support level at the 38.2% retracement marker at $32.12. Now, either a broad downturn or further losses to AAPL will push it down to its “line in the sand” at the 61.8% marker at $29.61.
After that, it’s a mighty steep drop to its 2013 lows at $25.56.
Our final analysis?
The XLK’s top three components all have very, very different prognoses.
Barring a broad market disaster, Apple (AAPL – NASDAQ) still looks like a buy.
But Google (GOOG – NASDAQ) and Microsoft (MSFT – NASDAQ) are looking increasingly vulnerable.
As always, the charts tell all.
Sincerely,
Adam Lass
Bottarelli Research Newsletter
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