3 Tech ETFs to Trade Into the Wildest Earnings Season Yet

Tech ETFs - 3 Tech ETFs to Trade Into the Wildest Earnings Season Yet

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The most important thing for investors is to avoid obvious mistakes especially when trading tech stocks and tech ETFs. Collectively, they tend to move fast and long in either direction. The prevailing current macroeconomic thesis is that the government stimulus packages will save the economy, and for good reason. The White House is throwing unprecedented amounts of money at companies and consumers alike. The $2 trillion package is likely to be phase one of many. Also, the U.S. Federal Reserve stated publicly that it has unlimited fire power to keep money flowing. They are even buying junk bonds for the first time ever.

However, that is also the bad news because things are horrific on the business fronts and there will be millions of losers. Some businesses will suffer beyond repair and die regardless of free money from the government. So the financial repercussions of the novel coronavirus are a threat to the economy like never before and beyond the obvious.

This week, Wall Street is going into the tech stock earnings seasons after an upbeat finish to a tumultuous week. It all starts with Netflix (NASDAQ:NFLX), and since it is part of the now famous FANG stocks, its price action after the earnings will affect the rest of the bunch. This includes almost all large tech stocks leaders, including Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG).

Sometimes it is easier to bet on the collective rather than pick individual winners and losers.That said, let’s delve into which tech ETFs would be the best to trade this earnings season. They are as follows:

  • Invesco QQQ Trust (NASDAQ:QQQ)
  • VanEck Vectors Semiconductor ETF (NASDAQ:SMH)
  • Technology Select Sector SPDR Fund (NYSEARCA:XLK)

There are nuances among these names, but keep in mind that the short-term reaction to the earnings is binary. We don’t know what the companies will say, and we definitely don’t have a clue as to how traders will react to the headline. Overall, all three of these ETFs are great long-term investments — and this discussion will assess the short-term expectations into what is likely to be the strangest earnings season on record.

Tech ETFs to Trade: Invesco QQQ Trust (QQQ)

Tech ETFs to Trade: Invesco QQQ Trust (QQQ)
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Source: Charts by TradingView

The QQQ is the most straight forward way to trade tech. It represents the Nasdaq Composite, so it is largely made up of the brands we all know and love. Apple (NASDAQ:AAPL), Google, Amazon, Facebook and Microsoft make up nearly 45% of the index, then the next four companies are about 2% each and they are Intel (NASDAQ:INTC), Pepsi (NASDAQ:PEP), Cisco (NASDAQ:CSCO) and Netflix. They did very well of late, thanks in large part to Amazon momentum. In spite of the world being closed for business, AMZN stock made new all-time highs.

Therefore, the easy trade would be to cast a net over all tech stocks and place the earnings bet on QQQ stock. The bulls have the right to be happy after last week’s performance. But conversely, those with bearish opinions are not crazy to expect carnage. This virus crisis is like none other in modern history, and there are a lot of unknowns. Nevertheless, for now, the buyers of equities are in control.

I suspect that the Netflix results will be better than forecast. We are all stuck at home, and we are definitely consuming more media. Streaming is the method of choice, and Netflix is the leader in that space. Even so, I don’t know if the expectations are already baked into the massive rally they all had. So the outcome this week still remains a binary event more than an invest-able thesis; Meaning, the short-term trades are definitely speculative regardless of fundamentals.

I expect technical resistance in QQQ stock going into $220 per share. However, the bulls will try to close the open gap from February to $230. From an investment or a swing trade perspective, I would prefer a bullish entry into the QQQ near $198 to $202 per share. Until then, though. I would be cautious betting too much money on upside without new macroeconomic headlines.

VanEck Vectors Semiconductor ETF (SMH)

Tech ETFs to Trade: VanEck Vectors Semiconductor ETF (SMH)
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Source: Charts by TradingView

The construct of the SMH compared to others is flatter. Other than 12.4% weighting from Taiwan Semiconductor (NYSE:TSM) and 11% from Intel, the rest of the leaders are spread evenly and roughly around 5% each. However, they do trade in tight unison, so betting on one of them is like betting on all. Occasionally, one would act the stray on intrinsic headlines.

Additionally, the time to buy the SMH stock was on its recent breakout from $122 per share. Up here it has filled the consequent target and should be headed into technical resistance. The better re-entry long is on a dip towards $125 per share. This is not the same as saying short it because there is an open gap to $144. The bulls should note there will be selling pressure from the last ledge at $139.50. This was a significant accident scene from early March.

The fundamentals of the group are relatively healthy. Yes, they will suffer from the interruptions in supply chains, but there are also disruptions in demand. Maybe the two cancel each other out long enough to help the companies like Micron (NASDAQ:MU) — for example — hit the ground running upon reopening the world for business. Overall, this is the ETF that would worry me the most if this supply chain interruption persists or gets more complicated.

Technology Select Sector SPDR Fund (XLK)

Tech ETFs to Trade: Technology Select Sector SPDR Fund (XLK)
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Source: Charts by TradingView

Buying the XLK stock is basically placing a large bet on Apple and Microsoft, as they total almost 42% of the whole bunch. Visa (NYSE:V), MasterCard (NYSE:MA) and PayPal (NASDAQ:PYPL) are surprising members, and they total another 11%. This is not a bad thing since it puts a little spin on the tech stock moniker — but then again, takes away from the comparison here.

What I dislike about this ETF is the fact that the top ten does not include Advanced Micro Devices (NASDAQ:AMD). This was the best performing stock for two years running. It’s been the chip champ for a while, and it deserves better representation here. Nevertheless, the group is healthy and would make for a great long term investment thesis. The top 10% inclusion of fintech and cloud king Salesforce (NYSE:CRM) puts a different spin on this ETF, with less emphasis on hardware sales cycles versus the SMH, for example.

Like the other two ETFs today, the XLK stock has open gaps to fill above and these are incentives for bulls. However, it is also headed into resistance from prior fail and pivot levels. A strong earnings season would help them plow through said resistance. The problem now for this and the other two is that while the world is closed, the odds of such strength is unlikely.

Of the these three names here, and for the long-term investment, I like QQQ first, XLK second and SMH third. The giant tech stock brands are winners now and for decades to come. However, after this rally, I have no strong convictions in any of the three for the short term. Buying them today is betting on a coin flip earnings reaction, and I fear that the next wave of economic reports will be horrific — and we are not ready for the scenarios they paint. Collectively, caution is more than warranted.

Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/04/3-tech-etfs-to-trade-into-the-wildest-earnings-season-yet/.

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