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Correction in U.S. Tech Sector? Inside Most-Hurt ETFs

Sanghamitra Saha

The U.S. technology sector is irresistible with the tech-heavy Nasdaq-100 ETF PowerShares QQQ ETF QQQ having added 18.4% so far this year and gained a stellar 30% plus in the last one year (as of June 9, 2017). This is far better than the S&P 500-based ETF SPY’s 9.4% year-to-date gain and 19.2% one-year advancement (read: Top ETF Stories of May).

Improving industry fundamentals, the emergence of new technology, upbeat earnings and Trump’s proposed corporate tax reform facilitated this dream run (read: 5 Ways to Play Unstoppable Tech Rally with ETFs).

However, the journey halted on June 9 after Goldman Sachs Group Inc. analysts led by Robert Boroujerdi raised a red flag and indicated that “low volatility in select technology giants including Alphabet Inc., and Apple Inc. may be blinding investors to risks.”

This led to a crash in the tech sector, with the Nasdaq composite logging “its worst week of the year.” As per CNBC, the tech tantrum may continue even in early this week as Apple – one of the drivers of the latest tech rally – was downgraded by Mizuho Securities' Abhey Lamba.

It seems that every piece of good news in the tech sector has been baked in the current valuation. After all, the market value of Apple, Alphabet Inc., Microsoft Corp., Amazon.com Inc. and Facebook has risen by $500 billion since December. As per Bloomberg, the price-earnings ratio of Nasdaq 100 was 26.1 as of June 9 close, over four percentage points higher than the broader gauge, marking the widest differential in over a year.

As a result, the alarms of a correction started ringing and investors hurried to book profits and flee the space. While almost most ETFs were in the red, semiconductor and momentum ETFs were hit the hardest. Below we highlight some of most-thrashed tech ETFs of June 9, 2017, which are likely to be under pressure in the coming days.

Semiconductor ETFs

PowerShares Dynamic Semiconductors Portfolio ETF PSI – Down 4.86%

iShares PHLX Semiconductor ETF SOXX – Down 4.20%

First Trust Nasdaq Semiconductor ETF FTXL – Down 3.95%

VanEck Vectors Semiconductor ETF SMH – Down 3.78%

Momentum ETF

PowerShares DWA Technology Momentum Portfolio ETF PTF – Down 3.75%

Cyber Security ETFs

PureFunds ISE Cyber Security ETF HACK – Down 3.07%

First Trust NASDAQ Cybersecurity ETF CIBR – Down 2.55%

Other Downtrodden Tech ETFs

Web X.0 ETF ARKW – Down 3.77%

First Trust NASDAQ-100-Technology Sector Index Fund QTEC – Down 3.59%

PowerShares Dynamic Networking Portfolio ETF PXQ – Down 3.46%

Ark Innovation ETF ARKK – Down 3.09%

PowerShares Dynamic Software Portfolio ETF PSJ – Down 3.01%

Should You Buy the Plunge or Stay Away from Tech ETFs?

Although it is too early to tell the future course, investors can consider buying the dip as sector fundamentals are still in fine fettle. It’s only overvaluation that is perhaps bothering the sector. So, as soon as pricing reaches the fair value, investors can consider joining the space again with little higher risk.

A Technical Look at QQQ

Even with Friday’s plunge, the fund is currently hovering close to its 52-week high. Its short-term moving average is above the long-term average as depicted by the 200-Day SMA in the chart below. This suggests continued bullishness for this ETF. The fund has a relative strength index of 50.86, meaning it is way behind the overbought territory and has some room to run.

However, the current price of QQQ ($139.98) is below the parabolic SAR (143.80), indicating a moderately bearish trend for the product. So, it will be wise to stay on the sidelines for a while and let the storm pass before entering the space again.  

As per barchaat.com, if the fund shoots higher, the first resistance point will likely come at $143.22, marking a 2.3% premium to the current level. The second resistance point will likely be at $146.45, about 4.6% premium to the current market price of QQQ.