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

| November 21, 2012 | 0 Comments

Every 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 the reality is 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 may be, 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 the 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 to sit 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.

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, large corporations will once again increase the amount of money they’re investing in technology.

As you know, the economic data indicates some real strength in the US consumer and small businesses.  If CEOs regain a bit of confidence to start spending some of their considerable cash hoard, 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: Options Trading

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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