Beyond Hype & Fearmongering

Last week was a challenging one for technology stocks, especially for those high-flying technology names that have carried the entire market for the last two years.

The S&P Technology Sector (XLK) was down 1.7% on Friday. However, it was higher for the week, underscoring the fact that tech is more than just those famous - or should I say those infamous - FAANG names:

• Facebook (FB)
• Amazon (AMZN)
• Alphabet (GOOGL)
• Apple (AAPL)
• Netflix (NFLX)

With that in mind, however, can those other tech names and the rest of the market move higher with the same vigor, as some of the FAANG names stumble?

It should be noted the Dow Jones Industrial Average has rallied three weeks in a row, and for the most part, the market has held up nicely during this earnings period. I suspect a power move once we get through the data.

Wind Beneath the Rally

It must have been cold there in my shadow,

To never have sunlight on your face.

-Jeff Silbar & Larry Henley

We know this rally has been powered by big tech names. While there have been other pockets of strength, the question is: what could provide the wind for a broad rally if all those big tech names slip or start to move sideways?

Before we announce the death of Big Tech, keep in mind that (except for Facebook, which is unchanged), there are other areas of tech for the year. The other areas of tech include computer chip stocks, up last week along with cybersecurity and software; both are enjoying fantastic gains this year.

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I believe cybersecurity stocks have significantly underperformed the headlines of cybercrime, including attacks on our elections. I want to embrace the sector more, but I’m having trouble because execution has been very uneven and sell-offs from disappointing earnings are often huge.

I like software. I believe this is a great niche of potential outsized gains for 2018 and 2019.

Then there are the chip ideas, which have been known to go into multi-year depressions. There are individual ideas in semiconductors that should outperform the market – but it’s a stock pickers niche.

As for those Big Tech names, I think there is still a lot of money to be made. Years ago, I put out four stocks I deemed “never sell,” which included Boeing (BA).  Right now, I think Amazon (AMZN) has that distinction. The company’s last earnings release was mind-boggling. 

The company’s earnings were 100% better than anticipated and a thousand percent year-to-year improvement.  It’s true that brick-and-mortars are learning how to compete in retail, while other tech companies are rushing to compete in the Cloud. I think the only thing that could stop a company’s earnings is governmental intervention/antitrust.

Apple (AAPL) was on my original “never sell” list, and I still have it in retirement accounts.  I believe management should be more aggressive, but no one can argue with success. The company reports this week, and I’m looking for strong results.

Halfway through earnings season, tech has been one of the bright spots as 36 of 71 S&P Tech names have already posted results:

• 86% beat on revenue, 14% missed
• 92% beat on earnings, 3% missed

Technical View

Because technology is so volatile (High-beta), using key metrics such as moving averages as buy-and-sell signals is difficult. Still, I think investor resolve would be tested if the XLK were to close beneath its 50-day moving average (see chart). The big moment of truth might be 68.66 from June 27^th.

I think tech must be overweight in most portfolios, even with the recent wobbles. In fact; in many ways, the number of opportunities has increased as major funds rotate out of the same old names.

The Broad Market

We were reminded on Friday that there are a lot of publicly traded stocks and it’s wise to have names in your portfolio that aren’t all the rage – because when the crowds come around, it’s better to already be positioned.

• NYSE: 70 news 52-week higher, only 39 new lows
• NASDAQ: 76 new highs, but 105 new lows

This underscores the nature of High-beta names that make big moves. It’s wonderful when they are rocking up, but it’s gut-wrenching when they come crashing down. The current pattern is clear – that’s why we asked subscribers to take profits into strength on a number of tech names.

Earnings Scoreboard (with 285 S&P Companies Reported)

According to Thomson Reuters:

• 72.3% beat on revenue
• 82.3% beat on earnings

According to FactSet:

• 77% beat on revenue
• 83% beat on earnings

The Key to Earnings Season:

• We learn about how well individual companies are executing and gain insight into future expectations
• We learn which businesses are taking market share and commanding higher prices without impacting volume, which means stronger margins
• We reassess valuations, which are determined by earnings and earnings potential

Biggest Lesson Learned 2Q18

Forward Price-to-Earnings (P/E) ratio, coupled with guidance, tells me the market is far from being overvalued, but it’s also extremely uneven, with respect to companies moving the ball much better than their peers.

Tariff Fears Overdone (from FactSet)

Q. Impact of Tariffs

A. Not much

149 Conference Calls:

• 70 mentions
• 43 little/no impact 2Q or future quarters
• 17 uncertain of impact
• 19 modest negative impact

We combed through many earnings results and management statements. Investors should know the biggest macro headwinds for publicly traded companies by far, which continue to be the following:

• Strong dollar
• Higher oil

The biggest threat to the stock market remains the Federal Reserve.

Today’s Session

On Friday, Caterpillar released its retail machine sales in June, and the news is there was an increase in North America and Globally.   The numbers were impressive suggesting maybe the company hadn’t reached a “high water” that they had mentioned on that now infamous conference call.

This morning, the company posted results for the second quarter beating the street on the top and bottom lines with earnings coming in at a second quarter record.

Management offered robust guidance as well, now seeing FY18 earnings per share on the high end at $12.00 from prior guidance of $11.25.  Moreover, the company’s operating margin trends are gaining momentum after slumping for numerous years.

During the quarter, the company added 4,400 North American workers and 5,700 outside North America bringing totals to 52,900 and 68,400, respectively.

The Dow is looking to open higher, while the Nasdaq is indicating lower.