The technology sector has been a strong relative performer so far this year, with the Select Sector Technology SPDR (NYSE:XLK) returning 12.1% and outpacing the 7.8% return of the SPDR S&P 500 ETF (NYSE:SPY) by 3.3 percentage points. This headline return, which has been driven primarily by the mega-caps Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), obscures the weak relative performance of many of the sector’s smaller players.
With the recent uptick in the broader market, many of these lagging stocks have shown signs of bouncing off of key resistance levels — meaning they could provide investors with some beta if the market can hold up through the summer. At the same time, the stocks in this group remain close enough to their breakdown levels that they also are likely to lag if the broader market takes a hit.
As a result, all of these names are worth considering if you’re looking for a higher-beta way to express an opinion on general market direction.
The semiconductor industry, in particular, is rich with charts that signal opportunities to pick up some excess return. Semiconductors always are an interesting source of trades during the otherwise quiet summer months. A look at the performance of the PHLX Semiconductor Index (the SOX) relative to the S&P 500 during the past decade reveals a large spread between the two indices, with a bias toward modest underperformance for semis.
| July-August | SOX | S&P 500 | Difference |
| 2011 | -13.3% | -7.7% | -5.6% |
| 2010 | -7.5% | 1.8% | -9.3% |
| 2009 | 16.4% | 11.0% | +5.4% |
| 2008 | -4.2% | 0.2% | -4.4% |
| 2007 | -1.6% | -3.0% | +1.4% |
| 2006 | 1.7% | 2.7% | -1.0% |
| 2005 | 13.1% | 2.4% | +10.7% |
| 2004 | -23.5% | -3.2% | -20.3% |
| 2003 | 26.8% | 3.4% | +23.4% |
| 2002 | -18.3% | -5.4% | -12.9% |
| Average | -1.05% | 0.22% | -1.27% |
With that as the background, Applied Materials (NASDAQ:AMAT), Altera (NASDAQ:ALTR), NVIDIA (NASDAQ:NVDA) and Lam Research (NASDAQ:LRCX) have all printed positive basing formations that look like they have room to the upside. However, given the seasonal headwinds to semis — not to mention the continued risk to the broader market — tight stops are in order with all of these names. Bearish traders, on the other hand, can look to the stocks’ 52-week lows for signs of a breakdown. These levels are: AMAT, $9.70; ALTR, $30.39; NVDA, $11.47; LRCX, $34.81.
Outside of the semiconductor sector, a number of stocks provide similar opportunities in that they have formed broad bases and currently are very close to breaking above their 200-day moving averages on the upside, or falling below their previous support levels on the downside. This list is peppered with names that have fallen out of favor in the past year, such as Corning (NYSE:GLW), JDS Uniphase (NASDAQ:JDSU), Computer Sciences Corp. (NYSE:CSC), VeriFone Systems (NYSE:PAY) and Sina Corp. (NASDAQ:SINA).
These five charts share a common ground: long-term basing patterns, multiple hits on a lower support level, and proximity to their 200-day moving averages. As with the semiconductor stocks listed above, however, these easily could break down to new lows with modest downside in the broader market.
If this seems wishy-washy, there’s a good reason for that: It is. However, we remain stuck in a choppy, news-driven market with sluggish trading volume that is likely to slow even further as we move deeper into the dog days of summer. In this environment, stocks that can provide beta in either direction are a valuable commodity. Short-term traders should put these names on their watch list and be ready to move as opportunities present themselves.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.
