Who doesn’t like technology? I mean, especially when it works. We all walk around now with little computers – which oh by the way also happen to make phone calls - in our hands. The computing power we now hold in the palm of our hand used to require a room full of hardware equipment, a lot of blinking lights and a typically frantic guy with thick glasses and a pocket protector sorting through reams of perforated paper trying to figure out how to keep the whole thing from shutting down.
Like I said, technology is great – when it works.
When it doesn’t work we tend to find ourselves wondering how in the world mankind survived for millennia without the internet. So logically people also tend to get excited about the idea of investing in “technology stocks” and “making a bazillion dollars” on the "hot new invention" or trend or product. For quite awhile now that pursuit has translated more literally into the phrase “buy Apple stock.” And while Apple has had a heck of a run, the future is guaranteed to no one (world domination tends to be a fleeting thing).
Many tech companies “ruled the day” and have since gone by the wayside (which reminds me, anyone interested in acquiring a gently used Commodore 64 and/or a like-new Wang word processor, please call my office). In fact, on the whole, despite the fact that the improvements in technology seem to move at the speed of light, the universe of technology stocks has come nowhere close to reaching the levels seen during the “tech bubble” of the late 1990’s (again with the obvious exception of AAPL).
To wit:
-Fidelity Select Technology (ticker FSPTX) topped out at $187.60 a share in 2000 and today trades around $100 a share.
While this is a vast improvement from the post-bubble low of $32 and change hit in November 2008, the fact remains that despite all of the incredible advances in technology since March 2000, the technology sector remains 45-50% below its all-time highs.
But now may be a time to take a look.
Technology Seasonality
So why is now a time to take another look at technology you may ask? Do I, as “professional market analyst” foresee "a coming boom" that will propel the majority of tech stocks based on "fundamental improvements" and a "new wave of new age", well, whatever? Um, not exactly. OK, actually, not at all. For I am a fairly strong adherent of:
Jay’s Trading Maxim #201: It is OK to make all the predictions you’d like regarding the financial markets. Just don’t be stupid enough to risk a lot of money thinking that you’ll be right (more succinictly: Predicting the future is really hard).
So rather than taking up space spelling out all of my really amazing “predictions” for the world of technology (and Wow, are they ever exciting!) and the profound impact that all of this will have on the performance of technology stocks, let me just put this out there:
Since October 1988:
-$1,000 invested in FSPTX between the close of October Trading Day #19 and February Trading Day #11 (or roughly 30% of all trading days) grew to $10,311 (or +931%).
-$1,000 invested in FSPTX during all other trading days (i.e., from mid-February into late October, or roughly 70% of all trading days) grew to $1,918 (or +92%).
So to put it another way:
-Tech stocks gained +931% during 30% of all trading days (late Oct. to mid Feb.)
-Tech stocks gained +92% during the other 70% of all trading days (mid Feb. to late Oct.)
So since my trusty calendar reminds me that we are nearing late October (and how the heck did that get here again so quickly!?) it is about time to take a look at technology stocks.
Jay’s Seasonal Technology Trading Strategy
Here is one way to play the typical seasonal strength in tech stocks between late October and early February:
-Using FSPTX as a proxy and as a trading vehicle (alternatives discussed later)
-Buy at the close on the 19th trading day of October (10/25/12 this year)
-Sell at the close the following day if FSPTX registers a gain of +12% or more
-Sell at the close the following day if FSPTX register a loss of -15% or more
-If neither target nor stop is hit, sell at the close of February Trading Day #11
Figure 1 displays the year-by-year results.
Figure 1 – Year-by-Year Results of Jay’s Seasonal Technology Strategy
All told:
-21 winners (88%)
-3 losers (12%)
-Average trade = +8.9%
-Median trade = +12.3%
-Worst loss = -17.3%
Figure 2 displays the daily equity curve for this system since 1988.
Figure 2 – Growth of $1,000 using Jay’s Seasonal Technology Trading System (1988-Present)
Alternatives
Because it has certain switching restrictions – and because not everyone has a Fidelity account, it may be useful to consider alternative investment vehicles. Figure 3 lists a few potential choices. There are others so you might want to do some homework, and just for the record I am not a fan of using leveraged ETFs for most strategies that last more than a few days. But again, do your own homework before applying a leveraged fund to the strategy I’ve detailed.
Figure 3 – Technology related alternatives to FSPTX
Summary
So are technology stocks certain to advance over the next three and a half months? Certainly not. Should anyone “bet the farm” on technology stocks based on a reasonably strong seasonal trend? Same answer. But these are not the real questions.
The real questions are:
-Does it make sense to risk a reasonable amount of capital on a strategy that has generated 88% winning trades (21 of 24)?
-Even if that strategy involves nothing more than a calendar, a profit target and a stop-loss trigger?
I leave you to ponder your own answer (but let me know if you want to make an offer on that Commodore 64...).
Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
