Technology Leads the Way

Doing a little evaluation, we see that the S&P 100 (My ticker $OEX) and the Dow Jones (My ticker $INDU) have all underperformed the S&P 500 since about October, based on a 20 day (1 month) relative strength analysis.

However, the NASDAQ composite (my ticker $COMPX) and the NASDAQ 100 (my ticker $NDX.X) have outperformed by about 4%.

I was watching Bloomberg, where David Kostin was on live. He’s Goldman Sachs chief US investment strategist. I put this link up last night, where he’s talking to CNBC, and they’re giving him a hard time.

http://wallstreetpit.com/52393-david-kostin-on-goldmans-2011-forecast

If you want to get a little background on him, and his predecessor, Abby Cohen, see

http://moneymorning.com/2008/03/19/goldman-sachs-replaces-its-sp-500-forecaster-abby-joseph-cohen/

Kostin reported on Bloomie that it would be big caps that would be the movers in the next market segment. His position was that about 25 stocks drive 2/3 of the margin growth, that it’s around 8.7% now, and will be going to 8.9%, in 2011 making those 25 have better earnings reports. He reported that his meetings with portfolio managers showed him that revenues and margins are their focus: revenues up, margins up will cause the portfolio managers to invest in those companies.

David also said that the large companies would improve their margins by investing in technology. He said that they will use the application of technology to improve their margins. His estimate was that there will be 500 Billion $ of capital investment this year. Yes, companies have a cash/asset ration of better than 10%, so it may be time to invest that cash. David says we’ll continue to see some stock buybacks from the cash rich companies, as well as some dividends. But he’s looking for the big guys to buy technology and put it to work to improve margins.

So I’ve been thinking about this. I look at the S&P 100, and the DOW, and they’re underperforming the NASDAQ100, and underperforming the NASDAQ composite. Now, what’s the NASDAQ 100 and the NASDAQ composite got that the S&P 100 and DOW ain’t got?

My answer: Technology companies.

So it looks like David is right on with his analysis. Technology is being bought. When I had to buy capital equipment, typically we placed the order, and the gear showed up in 6 months or so. Maybe we're seeing that now, the revenues start to rise in the technology stocks in October-November, and April-May we start seeing it being applied, so I'm looking at mid-summer to see the big-caps margins improve.

Thinking about this some more (It’s starting to hurt inside here). Who’s got the technology? Maybe it’s the smaller tech companies. If we think about it, maybe the smaller companies will see this investment of 500 Billion, grow their revenues, make their earnings improve and their stock prices outperform the big caps. But that's another post.

Here’s the weekly charts for S&P 100, the DOW, the CBOE NASDAQ 100, and the NASDAQ composite. I put the crosshairs on about the 0 point for relative strength (0 relative strength means that the chart price % change matches exactly the S&P 500 price percent change.) for your reference. It's the bottom window on each chart. These charts are courtesy of TDAmeritrade StrategyDesk.

Also, as you know, I’m full of bull. But there are some worrisome bear signals that I don’t like very much. I put one of my most important worries in the last chart. It’s the 3LB of the S&P500 stocks above their 50 day moving average, courtesy of stockcharts.com. We are in a clear downtrend.