We’re heading into earnings season for the tech stocks…and it’s coming at a time that the sector stands at a key technical juncture. IBM reported better-than-expected numbers last night and it is trading 3% higher in the pre-market. However, IBM hasn’t been the bell-whether tech stock in decades. (Besides, it’s still almost 40% below its 2013 highs…and its high for the year had come during the first half…in 7 out of the past 8 years…so any near-term pop in the stock may have a tough time holding-up.)
However, we do get a more important name tonight…and this one comes from one of the FAANG stocks. NFLX reports tonight…and how it reacts to these numbers will be very important for the stock…and it could be quite important for the big-cap tech names overall. As we all know (with the exception of GOOGL), the FAANG names have been dead money since late last summer…but several of them are starting to show signs that they could finally regain some upside momentum. NFLX is one of those names…as it is testing the top end of the sideways range it has been in since July. Therefore, if tonight’s earnings report can be a catalyst for a sustained breakout of that range, it’s going to be very bullish for NFLX on a technical basis.
(We used the phrase “sustained breakout” in the last sentence because NFLX did breakout of its sideways range for a couple of days back in January. In fact, it was its earnings report that was the catalyst for that breakout. HOWEVER, the stock fell back into its range within two days…thus that quick breakout turned out to be a serious “head fake.” We obviously want to guard against that kind of move once again this time around.)
However, if it can indeed see a sustained breakout, it should be VERY bullish. Let’s face it, since the stock has been dead money for such a long time, A LOT of the momentum money has exited the name. Since there is A LOT of money in momentum-based strategies in today’s marketplace, a confirmed rally above its sideways range for NFLX is likely to attract some of that momentum money that has been missing for quite some time. In other words, whenever a stock sees a confirmed breakout of a multi-month range to the upside, it almost always sees a sizable rally over the following weeks and months. NFLX should be no different.
This is very similar to what we’ve been saying about Facebook (FB). It has broken slightly above its own multi-month sideways range, but it has not done so in a significant way…so it is not a “confirmed breakout” yet. As we have highlighted recently, FB broke slightly above its old range…and has come-back down and tested the top-line of that range. Therefore, if it can successfully hold that line…and then rally back above its recent highs (of $314), it will give the stock the kind of bullish confirmation we have been looking for in order to raise a big green flag on the stock.
Of course, these stocks have been seen as ones that will do poorly in the re-opening trade. However, one could argue that the sideways action in these names over the past 8+ months (while the broad stock market has rallied substantially further) is telling us that these stocks have already priced-in the headwinds that the re-opening of the economy will provide. Therefore, if (repeat, IF) these stocks can indeed break above their multi-month ranges over the coming days/weeks, it’s going to catch a lot of investors offsides…and create a lot of demand for stocks like FB and NFLX.
Therefore, we’re at a key technical juncture for these two big cap names. (We’d also note that AMZN is not far from the top-line of its sideways range as well.) This is taking place at a time when both the tech laden Nasdaq Composite index and the SMH semiconductor ETF are testing their all-time highs from February (as we highlighted in our weekend piece). Thus, we’re at a key technical juncture for these important tech indices/ETFs…at the exact same time that some of the mega-cap tech names are facing the same situation/juncture.
We cannot get ahead of ourselves. If these names fail to breakout up at these levels…and instead, roll-back over in a significant way…it’s going to be quite negative. It will indicate that the FB & NFLX are going to remain range-bound (at best)…and that the Nasdaq Composite & SMH are making “double-tops”. THAT would not be good at all. Given that the SMH fell hard yesterday…in the face of news that wasn’t all that bad at all…we definitely have to caution against getting too excited about the upside potential for the tech group yet.
In fact, we still believe that long-term interest rates will bounce-back before too long, so that should create problems for the big cap tech names very quickly. However, we do have to admit that a breakout in FB and NFLX will be bullish…especially if it is followed by a breakout in the Nasdaq & the SMH. Therefore, there is no question that the tech sector stands at a critical juncture…and thus how it acts over the next couple of weeks is going to be very important as to how it acts over the rest of the second quarter and beyond.
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Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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