Time to take seasonal profits in the tech sector

My ETF column last September stated that the preferred strategy for the technology sector is "to wait until technical signs of a bottom have been reached before entering into a seasonal trade." Thackray's 2012 Investor's Guide notes that the period of seasonal strength in the technology sector is from Oct. 9th to Jan. 17th. The trade has been profitable in 16 of the past 22 periods, for an average gain per period of 10.5 per cent.

Technical parameters should be applied to fine tune entry and exit points for seasonal trades. Oct. 9 and Jan. 17 are average entry and exit dates over the past 22 years. Short-term momentum indicators (Stochastics, Relative Strength Index and Moving Average Convergence Divergence) are used each year to optimize entry and exit dates.

Normally, the entry and exit dates are on the average dates plus or minus about three weeks. The most recent buy signal for the technology sector based on momentum indicators occurred on Oct. 4th, when the S&P Technology Index closed at 377.55. On Friday, when short-term momentum indicators started to roll over from overbought levels, the index closed at 438.73, a gain of 16.2 per cent. 'Tis the season for investors to take seasonal profits in the technology sector!

Several recurring events occur at this time of year that support profit taking. The sector moves higher in anticipation of good news released at the Las Vegas Consumer Electronics Show in the second week in January. In addition, the sector advances in anticipation of seasonally strong fourth-quarter results. Apple's quarterly report is usually perceived as the "last of the good news for the sector," with traders later taking profits. The company released earnings last Tuesday.

On the charts, the S&P Technology Index is starting to struggle. It is finding resistance near its 10-year high at 441.67. On Thursday, Relative Strength Index (RSI) recorded a sell signal on a move below 70 per cent. Stochastics at 86.11 per cent are overbought and will record a sell signal on a move below 80 per cent. Moving Average Convergence Divergence (MACD) also is overbought and is close to a negative crossover of moving averages, the requirement for a sell signal.

Downside risk during the next two months is significant. The 10-year seasonality chart on the S&P 500 Technology Index shows that average decline per period was 8.5 per cent.

My column in September mentioned actively traded ETFs in the technology sector. The most actively traded ETF is iShares on the S&P Technology Index . Others include the Vanguard Information Technology Index Fund , Semiconductor HOLDRs , iShares on the Philadelphia Semiconductor Sector Index , iShares on the S&P GSTI Software Index Fund , the First Trust Dow Jones Internet Index Fund and iShares on the S&P/TSX Capped Information Technology . All have technical parameters similar to the S&P Technology Index.

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by JovInvestment. JovInvestment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/