Sectors To Watch: Tech So Bad It’s Good?

| November 19, 2012 | 0 Comments

technology sectorEvery day we’re moving one step closer to going over the fiscal cliff.  It’s scary to think about the impact higher taxes and spending cuts will have on the economy.

Just look at what similar austerity measures have done to heavily indebted European countries.  It’s not a pretty picture…

But most Americans aren’t changing the way they live their lives or run their businesses. 

It’s hard to say whether we’ve simply become immune to the nonsense in Washington DC or if we believe the fiscal cliff won’t have any impact on us.  Or maybe we think politicians will get things figured out at the last minute like they have before so there’s no reason to stress.

Whatever the case maybe, consumer confidence in the US is on the upswing.  In fact, consumer confidence is now at the highest level since before the financial crisis.    

Put simply, every day Joes and Janes are feeling good about where they are today and they’re optimistic about where we’ll be in months ahead.  That bodes well for future consumer spending and small business hiring and spending.

But the optimism so many of us feel today doesn’t make it to the top ranks of corporate America.  According to a survey done by the Wall Street Journal, CEOs economic outlook topped out in early 2011 and has deteriorated to its lowest level since we were in the midst of the 2008 financial crisis.

But this isn’t a recent development.

CEOs have been worried about the uncertain global economy for months.  It started with the sovereign debt crisis and recession in Europe, as well as slowing economic growth in China.  The fiscal cliff is only the latest event to create uncertainty in the global economy.  

As a result, the largest US companies dramatically pulled back on business spending and investment when the European sovereign debt crisis flared up last quarter.  And they continue sitting on their hands as we approach the fiscal cliff.

In fact, many large corporations are behaving as if we’ve already gone over the fiscal cliff! 

Obviously, the lack of business investment isn’t doing the economy any favors.  And the sector that’s been hit the hardest by the pull back in business investment is technology.

In fact, business spending on equipment and software stalled out last quarter after growing steadily higher for nine quarters in a row.

Businesses have simply put off their planned investments in new technology over the last few quarters.  That’s bad news for fast growing tech stocks.

Don’t forget, most tech stocks are growth stocks.  And if the amount of money spent on technology isn’t growing, it’s going to be tough for the sector to live up to the investors’ lofty expectations.

And the failure to live up to investors’ growth expectations has caused the Technology Select Sector SPDR ETF (XLK) to tumble more than 12% from its recent highs.

But here’s the thing…

If we don’t go over the fiscal cliff, tech stocks should come roaring back.  As you know, the economic data indicates some real strength in the US consumer and small businesses.

If CEOs regain a little bit of confidence and begin spending some of their considerable cash hoards, it could release a boatload of pent up demand.  And tech stocks could come soaring back to the forefront of the fastest growing businesses.

It’s worth taking a shot on buying some call options in XLK. 

Keep the premium under $1 and go at least six months out into the future to give yourself enough time for the rebound to take place.

Good Investing,

Corey Williams

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Category: Sectors To Watch

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.