Do you believe in the Santa Claus rally? If you’re among those expecting the traditional year-end uptrend in stock prices, you might want to consider the technology sector as the hunting ground for your next trade.
Click to Enlarge Here’s why: Based on the Select Sector SPDR-Technology ETF (NYSE:XLK), the sector is nearing the point where it could break out above major resistance at $27.09. This marks the fourth occasion in 2011 where XLK has approached this level, so a move above it would likely provide a green light for a nice trading rally. The last time XLK broke out above a resistance area was in November 2010, and it went on to post a 12.5% gain in the next four months.
One caveat: the ETF still needs to rise another 3.5% to reach $27.09, so we have a way to go. Still, there are two reasons to keep an eye on this chart. First, December has brought a gain for the broader market in 17 of the past 20 years, with an average gain of 1.99% in the month. If past is indeed prologue, similar strength in the month ahead would likely bring the XLK near a breakout point.
Second, based on the SPDR sector ETFs, XLK is the only nondefense sector trading above its 200-day moving average. (The others are utilities, consumer staples, and health care.) This indicates that technology is showing a good deal of technical strength relative to other economically sensitive sectors that are still trading under their 200-day MAs, such as materials and industrials.
With all of this said, is the best bet to play the XLK or individual stocks? Few of the largest tech stocks have printed a chart that looks like the XLK, but there still are plenty of technology names that are sitting just below their potential breakout points on the one-year chart.
Use the list below as a jumping-off point for further investigation into possible trade candidates. All are above their 200-day MAs and trading within striking distance of their previous highs. The list is ordered from the most interesting charts to the least:
- ARM Holdings (NASDAQ:ARMH)
- Rackspace Hosting (NYSE:RAX)
- TIBCO Software (NASDAQ:TIBX)
- Maxim Integrated Products (NASDAQ:MXIM)
- Google (NASDAQ:GOOG)
- Check Point Software Technologies (NASDAQ:CHKP)
- IBM (NYSE:IBM)
- Micros Systems Inc. (NASDAQ:MCRS)
Of these, the U.K.-based chip designer ARM Holdings appears to be the most compelling from both a technical and fundamental standpoint. The stock has been flirting with its breakout point, in the $32 range, for over a year now, and has the look of a stock ready to move out to new highs in a favorable tape. The stock isn’t cheap, with a forward P/E of about 44, but it’s growing fast through its exposure to the mobile and tablet markets via the various companies that use its designs, such as Apple (NASDAQ:AAPL), Qualcomm (NASDAQ:QCOM) and Nvidia (NASDAQ:NVDA).
Click to EnlargeARM also is breaking into new markets long dominated by Intel, such as servers and notebooks. On a longer-term basis, it’s true that everything has to go right for ARM with its valuation at current levels. In the short term, however, it’s this kind of positive story that can provide the foundation for a breakout if history repeats itself for the broader market in December.
Technology in general hasn’t been the high-beta play it used to be. Looking at the 12-month period that ended on Oct. 31, tech stocks lagged the broader market in the first half, when stocks were rising, then it outperformed in the latter half once stocks began to weaken — not what you would necessarily expect from this sector. But with the XLK chart sitting where it is, there’s a chance tech could be fertile ground for traders in the weeks and months ahead.