Rick Pendergraft's Avatar
published in Blogs
Oct 21, 2019

Breakout or breakdown for technology ETF with 3 top holdings set to report?

The Technology Select Sector SPDR (NYSE: XLK) saw two potential bearish signals generated in the last few trading days and these signals are coming as the earnings reports for the sector are getting ready to hit.

On October 17, the daily stochastic readings for the XLK made a bearish crossover as the indicators were in overbought territory. The fund did fall on October 18, but of course the overall market dropped significantly that day as well.

The XLK also saw a bearish signal generated from the Tickeron Trend Prediction Engine on October 18. The signal calls for a decline of at least 4% within the next month and it showed a confidence level of 71%. Past predictions for the fund have been successful 71% of the time.

The timing of the bearish signals is rather interesting as the tech sector is gearing up for a number of big earnings reports in the coming weeks. For the XLK, the top five holdings are all expected to report before the end of October and three of them are set to report in the week ahead—Microsoft (Nasdaq: MSFT), Visa (NYSE: V), and Intel (Nasdaq: INTC).

Microsoft will report on Wednesday, October 23 while Intel and Visa will report on Thursday, October 24. Microsoft is the largest holding in the XLK with a weighting of 19.55%, Visa is the third largest holding with a weighting of 5.47%, and Intel is the fifth largest holding with a weighting of 4.2%.

In order to compare the companies and look at how they rank compared to other stocks in all industries, I put together the following table. The ratings that are highlighted green are areas where the companies rank in the top quartile and the red ones represent areas of concern.

We see that all three companies rank in the top quartile in the Tickeron SMR rating scale. The SMR measures sales growth, profit margin, and return on equity. Being in the top quartile means the company is doing relatively well. Looking at the other categories we see that both Intel and Microsoft rank highly as far as the valuation ratings while Microsoft and Visa rate highly in the Profit vs. Risk rating scale.

The only two areas of concern are Visa’s valuation rating and Microsoft’s P/E Growth rating. I should also point out that Intel is expected to see earnings decline for the third quarter of 2019 compared to 2018.

Looking at the daily charts for the three stocks, all three saw their daily stochastic readings make bearish crossovers out of overbought territory in the last few days—like the XLK itself. As for the weekly charts, none of the three are in overbought or oversold territory. Intel and Microsoft’s stochastic readings are up near overbought territory while Visa’s weekly stochastic indicators are in the 45 range at this time.

Turning our attention to the sentiment towards these three stocks, you would expect the indicators to show a bullish skew simply because the companies have performed well and the stocks have all performed above average in terms of price performance. The one stock that does have some bearish sentiment directed toward it is Intel. The analysts are rather skeptical of the stock with only 13 out of 42 analysts ranking it as a “buy”. The buy percentage is only 31% and that is well below average.

The analysts’ ratings for Microsoft and Visa are both extremely skewed toward the bullish side with buy percentages of 93.8% and 92.1%, respectively. This could make the stocks a little more vulnerable to a pullback should the companies disappoint in any way.

The short interest ratio for Visa is a little higher than average and that could help the stock if the company disappoints.

All three of these companies look pretty solid, but as we know, when it comes to earnings reports any little thing can be made in to a big deal and can cause the stock to move sharply in either direction.

Related Tickers: XLK
Related Portfolios: TECHNOLOGY ETFs
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