Tuesday, April 7th, 2015

Pulling the Trigger

Regular readers will know that we have been stalking the US Technology sector since November 2014. Our previous notes (Early Warning, November 4th 2014, and Strike Two for US Tech, January 13th, 2015) have chronicled the progress of the sector relative to the rest of the US market:- the first as it peaked on our probability-based indicator; the second as it fell below its 52-week average on the same metric.

As the chart below illustrates, there are only four occasions since 1995 when the US Tech sector has peaked at a recommended overweight of more than +80%. They are January 1997, January 1999, March 2000 and April 2012. With one exception, the sector has then fallen dramatically to an underweight of at least -65% within the next 12 months. The exception was January 1999, when the overweight peaked in the high-80s, but did not materially fall through the 52-week MAV, which was then around 60%. This eventually led to the greatest bubble of them all, which burst in March 2000, when Tech went from an overweight of +100% to an underweight of -97% in March 2001.

US Tech Sector: Recommended Weight relative to US Index – 1995 to date

Pulling the Trigger

Source: Harlyn Research

In our second note we observed that there is typically a gap of eight to ten weeks between breaking down through the 52-week MAV and the formal downgrade from Overweight to Neutral. That ten week period was over on March 24th, which means that the downgrade will be slightly later than expected, mainly due to the massive PR campaign surrounding the launch of the Apple watch, which is unlikely to be repeated.

We are now confident that our formal downgrade will occur within the next two weeks, unless there is a truly spectacular surprise in the upcoming results season. The strong dollar continues to depress the value of overseas earnings, and to put pressure on the margins of those US manufacturers which are directly exposed to competition from emerging markets and Japan. Even long-term bulls will soon begin to appreciate the arguments in favour of a lower entry point.

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