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A Tradable Bounce Is Coming for This Sector

By Brian Hunt, Editor in Chief, Stansberry Research
Monday, November 12, 2012

After doing nothing but falling for the past seven weeks, Big Cheap Tech is ready for a rebound.
 
Regular Stansberry & Associates readers are familiar with our "Big, Cheap Tech" label. Many of the world's dominant tech companies, like Apple, Microsoft, Cisco, and Intel are trading for cheap valuations right now.
 
And when you factor in their huge cash hoards, they get even cheaper...
 
Cisco, for example, has a market cap of $89 billion... but has over $30 billion in net cash (cash on hand minus debt). The company generates over $10 billion in cash per year. It's committed to paying a lot of that cash to shareholders in the form of dividends and share buybacks.
 
My colleague Dan Ferris points out that Cisco is so undervalued, shares could rise 50% and still be cheap.
 
If Cisco and its fellow tech giants are a good buy, you wouldn't know it from their share price action since mid-September. The big tech fund (NASDAQ: QQQ) has fallen from $70.40 to $63.60 (a 9.7% decline). This fund is stuffed with the companies I just mentioned.
 
Part of this decline is due to weakness in the broad market. Part of it is due to a large decline in Apple (which has a 17% weighting in QQQ). But after falling so far so fast, tech stocks are ready for a bounce.
 
Below is a two-year chart of QQQ. It has an extra "pane" at the bottom. This pane contains an indicator called the "RSI." 
 
The RSI is an indicator that measures overbought and oversold conditions. A reading of more than 70 indicates an asset is getting overbought and "stretched" to the upside. A reading below 30 indicates an asset is oversold and "stretched" to the downside.
 
Often, extreme RSI readings precede snap-back moves in the other direction. It's the natural way a market relieves pressure.
 
Tech Stocks (QQQ) Have Sold Off and Are Badly Stretched to the Downside
 
As you can see, QQQ is at an RSI level similar to mid-2011 and mid-2012. Each time QQQ was this badly oversold, it staged a sharp rally. That's likely to happen again.
 
Sure, the news and sentiment is all bad for tech stocks. Everyone on CNBC hates Apple stock right now. People are terrified of the whole stock market... and the fiscal cliff.
 
Meanwhile, tech stocks are cheap and oversold. So betting on a bounce right here makes sense.
 
Regards, 
 
Brian Hunt




Further Reading:

Master trader Jeff Clark is watching one particular area of the tech sector closely... It's "storing up energy for a big move one way or the other," he says. "When the chart breaks out of the pattern, it could lead to a move of as much as 20% or so." Read more here: This Sector Will Lead a Year-End Rally.

In The Daily Crux
Market Notes
U.S. Dollar Index jumps to a two-month high... sitting at an important level for other financial assets.
 
Homebuilders Lennar, PulteGroup, KB Home, and Hovnanian soar 100%-plus over the past 12 months.
 
Utility sector XLU hits a fresh six-month low.
 
Big semiconductor "printing press" company Taiwan Semiconductor hits an 11-year high.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1379.85 +0.2% +12.3%
Oil (USO) 31.75 +1.4% -14.2%
Gold (GLD) 167.82 -0.1% -2.5%
Silver (SLV) 31.54 +0.5% -4.7%
U.S. Dollar 81.02 0.0% +5.4%
Euro 1.27 -0.4% -6.3%
Volatility (^VIX) 18.61 +0.7% -48.5%
Gold Stocks (^HUI) 481.21 -1.6% -17.9%
10-Year Yield 1.61 -1.2% -17.9%

World ETFs
Symbol Price
Change
52-Wk
Singapore (EWS) 13.05 +0.2% +16.0%
USA (SPY) 138.16 +0.1% +14.6%
S. Africa (EZA) 66.15 +0.6% +10.9%
S. Korea (EWY) 57.32 +0.3% +8.0%
Taiwan (EWT) 12.93 +1.7% +6.2%
Canada (EWC) 27.85 +0.1% +4.4%
China (FXI) 36.46 -0.2% +1.7%
Israel (ISL) 12.84 -0.3% -0.6%
Japan (EWJ) 8.95 +0.0% -0.9%
India (IFN) 22.39 -0.9% -2.8%
Lat.America (ILF) 41.53 -0.4% -3.0%
Russia (TRF) 14.00 -0.5% -9.9%

Sector ETFs
Symbol Price
Change
52-Wk
Construction (PKB) 16.23 -0.5% +45.2%
Media (PBS) 16.00 +0.4% +27.7%
Health Care (IYH) 81.91 +0.4% +23.0%
Consumer Svcs (IYC) 84.12 -0.3% +22.6%
Financials (IYF) 57.83 +0.1% +22.1%
Retail (PMR) 24.85 -0.3% +20.0%
Real Estate (IYR) 62.98 -0.3% +19.0%
Water (PHO) 19.29 -0.3% +17.2%
Biotech (PBE) 22.26 +1.0% +17.2%
Telecom (IYZ) 23.44 +0.1% +15.9%
Industrials (IYJ) 69.93 +0.1% +15.4%
Defense (PPA) 20.01 +0.6% +14.2%
Insurance (PIC) 17.11 +0.2% +13.7%
Big Tech (QQQQ) 63.43 +0.4% +12.9%
Software (PSJ) 26.39 -0.2% +7.1%
Transportation (IYT) 89.16 -0.7% +5.8%
Utilities (XLU) 34.67 -0.6% +3.3%
Basic Mat (IYM) 65.85 -0.3% +1.3%
Semis (PSI) 13.55 +0.3% -3.2%
Nanotech (PXN) 5.65 +0.2% -7.9%
Alt. Energy (PBW) 3.77 -0.5% -31.3%

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