Technology Stocks Have More Risk Than Reward Potential

Pinnacle Digest writes: Technology stocks have performed relatively well this year. While the Facebook IPO proved to be a huge failure for anyone who wasn’t a part of pre -IPO purchasing, the tech sector continues to increase dividends and the Nasdaq is up just over 20% in the last 12 months. While Chris Ciovacco believes tech stocks could continue to trend upwards, he is exercising caution after this strong rally and has sold out of XLK (Technology Select Sector SPDR Fund) based on four reasons in particular.

1.)  According to a recent Bloomberg story, growth prospects for technology companies may be more limited than in the past:

U.S. technology companies have pushed their dividends to the highest level on record, a signal to investors that profit growth in the industry is slowing. While bulls say bigger dividends are a sign of confidence after 11 straight quarters of rising earnings in the industry left companies with ample funds to compensate shareholders, bears say boosting payouts shows chief executive officers are running out of ways to use their cash.

2.)  Chris’ technical analyses shows that momentum in the tech sector is waning and downward pressure is beginning to make its way into the XLK market.  “The last high in the ratio of tech-to-stocks (XLK:$SPX) came with negative divergences in both daily RSI and MACD” stated Ciovacco. He provides charting in his article to back up this thesis.

3.) Ciovacco highlights the fact that not only have tech stocks had a great 12 month run, they have come a long way up from their June lows. This kind of aggressive and quick rally raises red flags for any market technician.

4.) While Ciovacco remains bullish on the stock market, he believes there are much better risk/reward opportunities than the tech sector. His recommendations are commodities (DBC), precious metals (GLD) and materials (XLB).

Click here to read his full article on what sectors look more attractive than technology.