What the Top Technology Stocks Are Telling Us About the Market

What the Top Technology StocksThe breakdown in Apple Inc.’s (NASDAQ/AAPL) stock market price continues to be significant, and if the position drops to the $500.00-per-share level, it will represent a 29% drop from its recent all-time high on the stock market. It’s fair to say that Apple’s profitability is now well entrenched, but every business goes through its own economic cycle, and revenues and earnings estimates for Apple are coming down for future quarters. The company reports its earnings results on January 23.

The “AGA” stocks are important indicators because of the size of their stock market capitalizations. AGA is my acronym for Apple, Google Inc. (NASDAQ/GOOG) and Amazon.com, Inc. (NASDAQ/AMZN). These three technology stocks represent approximately $880 billion in stock market capitalization at current share prices.

Amazon.com has been on a tear over the last three years. The stock has done very well, even though it is incredibly expensive. Wall Street analysts expect Amazon.com to increase its top-line growth about 30% in 2012 and another 30% this year. Earnings estimates from the Street are all over the map. The company’s stock market chart is featured below:

AMZN Amazon.com Nasdaq stock market chart

Chart courtesy of www.StockCharts.com

I would say that the stock market is quite vulnerable if fourth-quarter earnings results don’t surprise to the upside. Meeting expectations isn’t going to cut it with investors, especially since those earnings expectations came down so much during the last earnings season.

The NASDAQ Composite looks to have formed a perfect head-and-shoulders technical formation, which began in early 2012. Oracle Corporation’s (NASDAQ/ORCL) recent earnings were good, but we’ll likely see continued weakness in technology stocks, at least those that are more consumer-oriented. Apple’s stock market performance is the leading indicator for this trend.

Companies like Hewlett-Packard Company (NYSE/HPQ) and Dell Inc. (NASDAQ/DELL) did terribly on the stock market in 2012. These businesses suffered due to not only the intense competition within the technology industry, but also the shift away from the personal computer (PC). Both Microsoft Corporation (NASDAQ/MSFT) and Intel Corporation (NASDAQ/INTC) have been struggling on the stock market; Intel’s third-quarter earnings were hurt by weakness in Europe and the strength of tablets. Microsoft’s stock chart is below:

MSFT Microsoft corp Nasdaq stock market chart

Chart courtesy of www.StockCharts.com

I’m not bearish on the stock market, only realistic. It’s too early in this earnings season to get an idea of how corporations are doing, but even if they beat consensus, earnings growth is minimal. So, that’s why I’m not expecting much from this stock market, and I wouldn’t be making any new bold bets. There really isn’t a lot of new action to take in this market. A catalyst for new positions hasn’t presented itself yet.

A substantial correction in the stock market would be an attractive entry point for new positions, and I’d focus on large-cap, dividend paying stocks with the majority of their operations in North America. You might not have noticed, but talk about the sovereign debt crisis in media has virtually disappeared; yet the problem is still very real. (See “The Debt Demon Lurks—It’s Still Out There Waiting to Strike.”) European policymakers didn’t fix this problem; they only provided a “bailout” using more debt (sound familiar?). If policymakers don’t work together toward change, then one of these days, there’s going to be a real crash. Anyway, I am hopeful this earnings season, but it’s still low and slow for the near future.