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The Technology Sector Indicator

08/07/2012
Over the past several weeks, our blogs have focused on the potential for the SPX to appreciate toward the upper end of this year’s 1258.86 to 1422.38 trading range. Within those blogs, we have included on multiple occasions an S&P 500® Index (SPX) chart (Figure 1.1) that highlights a series of higher lows since June 4, 2012. Leading the SPX higher is the technology sector. Investors should maintain technology allocations at overweight.
 
Over the next few weeks, I encourage investors to closely monitor the technology sector as a priority indicator as to whether the current bullish momentum for the SPX will sustain or stall. This does not suggest that I expect technology to stall; I still expect it to lead the market higher. However, as occurred in Q2, the loss of upward momentum in the technology sector would be a leading indicator that the current SPX appreciation will pause. 
 
Fundamentally, multiple tailwinds are supporting the technology space:
 
1.  During calendar Q2 analysts aggressively lowered EPS estimates and sales growth for the second half of 2012. That places technology companies in a unique position of having a very low bar to exceed for the first time since 2009. On average, Street estimates for the sector were lowered 10% for the upcoming calendar Q3. 
 
2.  Investor emphasis on yield places technology in favor as the sector with the highest likelihood to increase dividends and buybacks before year end. Robust cash balance sheets for the sector provide the evidence that it has the highest likelihood to return capital.
 
3.  Historically, the final four months of the calendar year provide the sector with both consumer and enterprise spending tailwinds. Consumer spending on the upcoming back-to-school and holiday seasons will support revenues as will an end-of-year budget flush by corporations.
 
4.  The upcoming September 12, 2012 Apple (AAPL) iPhone 5 announcement should provide a positive halo for the entire technology sector. Estimates for calendar Q4 iPhone sales suggest a near double to 50 million units.
 
5.  Finally, a rather consistent historic seasonal trade since 2001 suggests that technology performs well from mid-August to year’s end. Since 2001, the XLK has finished the year higher than the identified mid-August trough price in each year except 2008.
Take a look…
 
    •  August 19, 2011 close $22.52 and 2011 final close $25.45
    •  August 31, 2010 close $20.69 and 2010 final close $25.19
    •  August 17, 2009 close $19.24 and 2009 final close $22.93
    •  2008 failed to appreciate
    •  August 16, 2007 close $24.59 and 2007 final close $26.66
    •  August 11, 2006 close $19.71 and 2006 final close $23.26
    •  August 26, 2005 close $20.60 and 2005 final close $20.90
    •  August 12, 2004 close $17.95 and 2004 final close $21.11
    •  August 11, 2003 close $17.07 and 2003 final close $20.38
    •  August 13, 2002 close $13.61 and 2002 final close $14.80
    •  August 30, 2001 close $22.83 and 2001 final close $24.00
  
Figure 1.1 S&P 500 Index (SPX) Year To Date

Source:  Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.