Last week, I pointed to the potential for serious channel stuffing in the technology sector as we approach year end. The upshot of this was that, to the degree tech’s strong fourth quarter is to continue, we need to see a brisk pace of business capital expenditure. That’s the macro picture which would support a continued rally in tech shares. Here’s a bit of technical analysis on the same front by Andy Lees at UBS. Andy writes:
The long term log chart of the Nasdaq is coming to an important level. The trend line that has described several of the main indicies (NYSE composite is another) extremely well since post 1974 oil crisis low is now coming back into play
As you can see the index is looking to test the trend. On the 5 previous occasions that it touched it moved an average of 24.06% in the subsequent 4 or 5 weeks….
- 3rd Oct ’74 -> 8th Nov ’74 +21.6% from 54.87 to 66.75
- 12th Oct 90 -> 6th Dec ’90 +17.1% from 322.98 to 378.4 on its way to 481 by March the following year
- 10th Oct 02 -> 29th Nov 02 +37.7% from 1108.49 to 1526.4
- 26th Sep 08 -> 23rd Oct 08 -30.3% from 2155 to 1502
- 26th Apr 10 -> 6th May ’10 -13.6% from 2535 to 2189
Whilst it is easy to dismiss charts as hocus pocus, such a long term trend presumably reflects the state of the investors balance sheet and therefore his willingness to take on or reduce risk. Clearly this chart is more suggestive of buying volatility rather than anything else. If you were a strict chartist you would sell into the trend line with big stops above it.
As we saw with GDP data a couple of days ago US earnings as a whole were at a record high in Q3. Add to this the QE, and the way yesterday’s data is being touted as the start of a self-sustaining recovery, and I think a break of the trend line could see a similar rise again. On the other hand there are still plenty of problems with Europe’s sovereign mess and Chinese inflation highest up on the list, so it is easy to imagine the downside as well. My own view is that the negative data is in the market already (just look at macro surprise data) and people are ignoring the fact that the European power house, whilst not willing to do the lifting through inefficient subsidies is nevertheless doing the lifting through its own very strong growth. I think positioning supports the idea of a big year end rally and recommend a punt on the S&P January 1250 calls @ 9.6.
So, that’s the bullish case for shares. Again, I don’t think you can sustain this in tech beyond a short-term rally without a robust investment in capital by business. And I suspect that would also mean increased hiring as well.