Tech Sector Performance Not up to Par

07/21/10 — So far, we’ve not had any confirmation of the strength of Intel Corporation (NASDAQ/INTC) in the technology sector. This is a telltale sign that the economy’s in a state of lackluster growth. The technology numbers aren’t saying that the economy’s in trouble necessarily, only that it isn’t really going anywhere.

The financial results for IBM (NYSE/IBM) are always an important benchmark, because this company sells a lot of computers, but also a lot of information processing services. It is one of the best benchmarks for the technology sector.

The company reported a two-percent increase in quarterly revenues and a nine-percent increase in earnings. This was under the market’s growth estimates. Importantly, the company disclosed that the value of its service contracts dropped 12% during the quarter to $12.3 billion. IBM’s getting hurt by weakness in the euro, as the company does most of its business outside the U.S. And, like most big businesses, IBM has only been able to grow its earnings through strong cost controls. This isn’t sustainable if revenues don’t accelerate over the coming quarters.

We also saw results from Texas Instruments Incorporated (NYSE/TXN) that didn’t come up to Wall Street’s expectations. The company’s second-quarter sales grew strongly, but not enough to impress investors. Management did say, however, that it expects a strong third quarter this year.

It’s a mixed bag of results so far this earnings season and this isn’t surprising. Some businesses are growing, while others are not. What is crucial is how investors are interpreting the numbers and, so far, negative sentiment prevails. The stock market seems bent on breaking below Dow 10,000. The only question is: how low will it go?

I think that investors need to consider some protection for their equity portfolios. Anything can happen to the markets, of course, but it just doesn’t seem very plausible that a new stock market rally will develop anytime soon. You can short the market doing something as simple as buying an ETF. I never liked going short, but I see how useful it can be in a diversified portfolio.