Move Away From the XLK, Folks. There’s Nothing to See Here.

by Tyler Craig | January 10, 2013 8:34 am

With the bulls ringing in the New Year, optimism has infiltrated virtually every sector associated with the risk-on trade.

The key word is “virtually.”

Unfortunately, the pull of the bull still hasn’t successfully recalled the technology sector from its wanderings in the land of underperformance.

While many chart-watchers use the Nasdaq as the premier benchmark for the tech space, we’re going to zero in on the Technology Select Sector SPDR (NYSE:XLK[1]) to investigate why tech continues to be the most unruly offensive sector. As shown by the falling Comparative Relative Strength line in the accompanying chart, XLK continues to exhibit relative weakness versus the S&P 500 Index.

Remember, the performance of the XLK — along with that of all most ETFs, I might add — is merely the sum of its parts. If the majority of the individual stocks contained within the fund are rising, then the fund should be rising. If, on the other hand, the individual components are falling, the fund should be falling. That said, not every stock has equal influence on the end performance of the fund — most ETFs are weighted by market capitalization, with the largest companies exerting the most influence.

And therein lies the culprit for the bulk of XLK’s poor performance.

Currently, XLK’s top three holdings are Apple (NASDAQ:AAPL[2], 17.2% weighting), IBM (NYSE:IBM[3], 7.13%) and Microsoft (NASDAQ:MSFT[4], 7%). All told, these three amigos comprise 30% of the entire tech sector ETF. So essentially, as go AAPL, IBM and MSFT, so goes the entire XLK.

Unless you’ve been living under a rock for four months, you’re probably well aware that AAPL has lost some major mojo[5]. It still is floundering around the $500 level in an attempt to find a bottom. And with declining 20-, 50- and 200-day moving averages, things still are quite precarious for the rock star of days gone by.

We’ve included the price charts of both IBM and MSFT as well. While IBM has put in a few higher swing lows over the past month, its action remains uninspiring and more upside is needed before a convincing uptrend takes root.

Finally, we have poor ol’ MSFT, which must have missed the bullish memo sent out in mid-November. While the broader market has been powering higher, Mister Softee has been taking a circuitous trip to nowhere.

In sum, if you’re inclined to play in the tech space, do yourself a favor and steer clear of XLK as long as these three big caps remain on the ropes. The likes of Google (NASDAQ:GOOG[6]) and Amazon (NASDAQ:AMZN[7]) are much more appealing right now.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. XLK:
  2. AAPL:
  3. IBM:
  4. MSFT:
  5. AAPL has lost some major mojo:
  6. GOOG:
  7. AMZN:

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