Technology stocks have been on a tear over the last quarter as “old school” technology companies like Intel Corporation (INTC) and Cisco Systems, Inc. (CSCO) have been leading stocks higher along with some of the “New Tech” names like Facebook Inc (FB).
Looking at the Technology Select Sector SPDR (XLK), shares of the technology exchange-traded fund have doubled the broader S&P 500 index returns, making it one of the relative-strength-leading groups in the market.
Of course, the big question is “Will the strength in technology continue?”
According to history, the answer is “yes.”
Seasonally, the technology sector averages posts average returns that are better than the S&P 500 every month of the second half of the year with the exception of December when the technology ETF only bests the broad market 38% of the time. The seasonality table below displays the XLK shares’ monthly performance against the S&P 500 over the 19-year span.
Looking at the sector ETF, it becomes clear that much of the performance over the last three months has come down to a handful of companies that the market has favored.
Looking at the technical, sentiment and seasonality data for some of the heavier-weighted names in the technology sector, the following three stocks appear to be ready to continue their strength at least through December…
Technology Stocks That Will Outperform: Apple Inc. (AAPL)
As much as we not like to admit it, Apple Inc. (AAPL) is historically one of the stronger performers of the technology sector in the second half of the year.
The reason we’re adverse to Apple is because of the sentiment backdrop, which almost always suggests that the stock is a crowded bullish trade, which often limits upside potential.
This year, Apple heads into the end of the year with a lot of skepticism from analysts and The Street, as the company’s product development has lacked breadth and has been iterations instead of innovations of their product lines.
The upcoming release of the iPhone 7 offers an opportunity to surprise investors, which will act as a catalyst for the shares.
Technically, Apple stock is in the process of potentially transitioning from an intermediate-term bearish pattern as the stock is trying to break above its 200-day moving average. This would target a move to $112, of which a break above would then target $120. From a technical perspective, the stock has the upside potential to lead into the year-end trading with a target of $120.
Technology Stocks That Will Outperform: Microsoft Corporation (MSFT)
A quiet leader in the technology sector has been Microsoft Corporation (MSFT). The company has been performing fundamentally, which has resulted in price performance, returning more than three times the S&P 500 performance over the last three months.
From a seasonality perspective, Microsoft stock performs better than the S&P 500 almost every month in the second half of the year, with August and September providing the best returns against the market.
From a technical perspective, Microsoft is trading in a long-term bullish patter with a number of trendlines and chart levels to provide support in the case of a market pullback. Currently, the most notable level is at the $55, which would be a great level to purchase shares on a pullback.
From there, our model, which ranks Microsoft a buy, targets a potential move to $65 by year-end.
Technology Stocks That Will Outperform: Visa Inc (V)
OK, most people may not think of Visa Inc (V) as a technology company, but it is. Visa represents almost four percent of the Technology SPDR, putting it in the top ten weighted companies.
Unlike the other stocks we’ve mentioned, Visa shares have not been outperforming the market lately. A tight trading range has dropped Visa’s performance below the S&P 500 over the last three months, but there is indication that this is likely to change.
Historically, Visa stock posts incredibly strong seasonal returns against the market for the last half of the year, which makes sense when you figure the holiday transactions that the company will process. Between August and December, there is only one month that has seen an average loss (September), but the stock still outperforms the market 63% of the time during that month.
In other words, this stock is a great hold for generating alpha for August through December.
From a long-term perspective, Visa stock remains in a bull market trend as the stock’s 20-month moving average is below it, and ready to provide support if needed, at $73. Sentiment on shares is somewhat neutral and does not suggest a crowded trade, as short interest is average and the analyst buy recommendations are in line with the average for the S&P 500.
A break above the $81 mark should begin to get some momentum behind this end-of-year seasonal performer and target a rally towards $90.
As of this writing, the Johnson Research Group did not hold a position in any of the aforementioned securities.
