Four Horsemen of Technology Running Strong Again?

In this market, I find it hard to think of any stock as ‘running strong’ unless they are in the precious metals business, but strong can also be a relative term.

Some stocks have held up better than others – and even shown considerable buying interest – over the course of the past few weeks and months. Four which stand out from the past are the so-called Four Horsemen of Technology: Research in Motion (RIMM); Amazon (AMZN); Google (GOOG); and Apple (AAPL).

All four of these large cap tech generals have recently provided a positive earnings surprise, with the most recent surprise coming with Google yesterday afternoon. Had it not been for the Steve Jobs health issue, all four stocks would be crushing the S&P 500 index over the course of the past two months highlighted in the chart below. In fact, even with the Jobs issue, Apple is relatively even with the broad market index.

Investors are wondering which stocks will provide leadership in the next bull leg. My guess is that the next group of leaders will include one or more of these tech titans.

[source: BigCharts]

Disclosure: Long GOOG at time of writing.

Where Is the Leadership in this Rally?

For the last three weeks, I have been impressed by the confidence and resolve shown by the bulls as they have consistently used pullbacks to flood the market with new long positions. Perhaps algorithms have no fear…

More recently, however, as the bull leg has stalled around the SPX 900 mark, I have found myself thinking about the lack of ‘proper’ leadership. Yesterday and today, the rallies have been led by commodities, with gold and energy equities the top performers.

At the same time, the three sectors I think are most critical to the recovery, my so-called ‘indicator species’ sectors (financials, homebuilders and consumer discretionary stocks), have been unable to get out of the red today.

I am not sure where the leadership will come from that will eventually push the SPX back over 1000. Today large cap technology names First Solar (FSLR), Apple (AAPL), Dell (DELL), Research in Motion (RIMM), eBay (EBAY) and Intel (INTC) are all strong performers. Frankly, I would expect technology to play a strong role in the next big leg up, but leadership may come from a number of other sectors.

There are few guarantees in the stock market, but I can guarantee that gold and energy are not going to pull the SPX up over the 1000 mark and leave financials (XLF), homebuilders (XHB), and consumer discretionary stocks (XLY) behind.

[source: StockCharts]

August Sector Recap

August was a month in which the S&P 500 largely drifted sideways, but there was a good deal going on in the various sectors that make up the index. The graphic below shows sector performance for the nine sector SPDRs for the first eight months of 2008 (bottom) and for the month August (top).

On the plus side, the turnaround in the consumer discretionary sector (XLY) is clearly responsible for much of the recent positive momentum in the SPX. Also worth noting is that four other sectors outperformed the index in August: consumer staples (XLP), health care (XLV), industrials (XLI), and technology (XLK).

As has often been the case during the past few months, when the SPX has been moving up, energy (XLE) and materials (XLB) have been moving in the opposite direction. In August, the financial sector (XLF) was also pulling the index in the wrong direction.

Watch the consumer for more clues about sector leadership and overall market strength in the month of September.

[source: StockCharts]

Biotech on a Tear

While most sectors have been faltering for the past month or two, biotechnology has been an exceptional performer, with the top biotech ETF, IBB, now more than 15% above its June low, as the chart below shows.

I last profiled biotech on May 1^st in Time for Biotech to Turn Around? In retrospect, May and June were excellent months to get long biotech, even as the broad markets headed south.

Of IBBs top ten holdings, five of the ten are currently at or just below their 52 week highs, including:

• Amgen (AMGN) – making another new 52 week high today
• Illumina (ILMN) – made a new 52 week high yesterday
• Celgene (CELG) – just 1.6% below its 52 week high
• Gilead Sciences (GILD) – 5.7% below its 52 week high, but up about 40% for the year
• Genzyme (GENZ) – 7.1% below the 52 week high, set back in January

Of course, there are many more success stories among some of the smaller cap biotechnology companies. So while the markets drift sideways and we wait to see if traditional technology stocks can provide leadership, this might be a good time to stock up on one of the few strong sectors: biotechnology.