The Danger in Technology Stocks

By Thursday, May 31, 2012

Technology StocksTechnology stocks have had a bumpy ride lately, but none more so than some of the new initial public offerings (IPOs). Some of these technology stocks have had a huge 52 week range, such as Groupon, Inc. (NASDAQ/GRPN) with its range of $31.14-$9.63. Zynga Inc. (NASDAQ/ZNGA) and now Facebook, Inc. (NASDAQ/FB) are other technology stocks that have gotten killed once they went public. The market sentiment is obviously all over the place in these technology stocks. But, for those thinking they’re cheap, I’d say be careful of trying to catch a falling knife.

I already advised my readers not to invest in Groupon when it was trading much higher, in the article, The Danger with Investing in Groupon. The main points of my article then also apply to other technology stocks right now; including making sure that the company has an entrenched competitive advantage to prevent competitors from stealing its customers. For Groupon, there are no barriers to entry and no loyalty from customers. Other technology stocks with this problem include Zynga, maker of video games like “FarmVille” on Facebook. While some video games do have some loyalty, I think it’s highly likely that 10 years from now people will be bored with buying virtual animals and have moved to other games. So, now, an investor is betting that Zynga can come up with blockbuster games year after year, a hard task for any technology stocks.

We then move on from low barriers of entry and fickle consumers to the market sentiment of technology stocks and the valuation placed on them. Facebook is the prime example of smart money getting out and the public (or dumb money) getting in. None of the institutional traders I talked to even considered buying shares when the stock launched its IPO. If I had shares pre-IPO, I would’ve dumped them on the first day happily. Market sentiment can shift quickly and if you’re buying technology stocks where the value is at an extreme, you’re setting yourself up for a fall.

technology stocks chart

Chart courtesy of www.StockCharts.com

With all of the bad news in these new technology stocks, the one positive bit of technical analysis is that there was a slight bullish divergence in the early part of May. While price made a new low, the Relative Strength Index (RSI) and moving average convergence/divergence (MACD) did not. This does not mean that market sentiment has changed; in fact, it’s still quite negative. At this point, I would wait for the stock to make a base and establish a new trend before entering, as it’s quite possible a new low will be made.

 technology stocks chart

Chart courtesy of www.StockCharts.com

 Zynga is a good example of trying not to catch a falling knife, as market sentiment continues to get worse. While some might have thought that the low was made in the early part of May, as there was a slightly bullish divergence occurring, without waiting for confirmation (which never came), this stock was susceptible to even more selling. The negative market sentiment continued and the selling in fact did materialize.

Facebook is one of the newest technology stocks and there isn’t enough technical data to make any judgments off of it. What I do know is that, at $38.00, it was massively overvalued. Perhaps market sentiment might change in the $20.00 range, but only time will tell. For now, stick to the traditional technology stocks, the market sentiment of which isn’t as fickle.

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About the Author, Browse Sasha's Articles

Sasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what... Read Full Bio »