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Can the Stock Market Recover without Tech?

Here's a quick recap of the beleaguered technology sector:

  • Apple (NasdaqGS:AAPL) is still in bear market decline and sits around 20% below its $705 peak. The stock hit a 3-month low of $525.62 on 11/15 and still has technical damage.
  • Social media stocks like Facebook (NasdaqGS:FB), Zynga (NasdaqGS:ZNGA), and Groupon (NasdaqGS:GRPN) that were promoted as a sure thing - are down between 45-90%.
  • Hewlett-Packard (NYSE:HPQ) shares hit a 10-year low today. The company took an $8.8 billion charge claiming more than $5 billion of that amount was because of false accounting from the value of Autonomy. 
  • Intel's (NasdaqGS:INTC) share price is down -17% since August and Paul Otellini, its CEO plans to retire in May 2013. The chipmaker's business, like others that relied heavily on computers (NYSEARCA:XSD), is deteriorating as technology shifts away from desktop computing to mobile.
  • After leading most of the year, technology stocks are now underperforming major stock market benchmarks like the S&P 500 (NYSEARCA:IVV) and the Dow Jones Industrial Average (NYSEARCA:DIA).

Tech is Big...Very Big Technology is an important component of the broader stock market - making up 18-22% of sector representation. That's much larger compared to other sectors including financials (NYSARCA:XLF) and healthcare (NYSEARCA:XLV). When it was rallying, the tech sector lifted the market. Conversely, its recent decline has acted as a major performance drag.

Even before the fall in tech shares, we correctly anticipated that bullish market sentiment in the sector was overheated. And besides other factors we track, the headlines proved us right. Here's a sample of the rosy outlook from just a few months ago:

"Wall Street Analysts Increasingly Bullish as Apple Hits Fresh Highs." - Wall Street Journal on 8/27/12"Apple seen as 'trillion dollar baby'" - MarketWatch on 8/21/12"Apple could be worth a trillion in one year" - The Atlantic Wire on 9/23/12Fast forward to now.

It took Apple four months to rally 20% (Jun-Oct 2012) but just a little over one month to drop 20%. (Sep-Oct 2012) Right as Apple and the rest of the tech sector was topping, the ETF Profit Strategy newsletter alerted readers with this 9/20/12 update:

"In the short-run, technology ETFs look overstretched, so a pullback to $63-66 zone for QQQ, $27-29 for XLK wouldn't be out of order."

Since that 9/20 alert, the Nasdaq-100 (NasdaqGM:QQQ) has fallen almost 10%. (See chart above) Not only did we hit our target zones, but inverse 2x (NYSEARCA:QID) and 3x (NYSEARCA:TECS) are ahead between 15-25% over the past month. Antifragile investing at its finest, you might say. (See Nassim Taleb's wonderful WSJ article on "Learning to Love Volatility.")  The ETF Profit Strategy Newsletter uses relative strength analysis along with common sense technical analysis to provide a short, mid, and long-term forecast along with actionable buy/sell recommendations. This is how we identify key trend changes in the sectors as well as the broader markets.In summary, it will be difficult for the stock market to recover without the participation of the technology sector. Follow us on Twitter @ ETFguide