2023-10-03 09:55:42 ET
Summary
- Despite recent declines in the stock market, a crash is likely not imminent and tech stocks are rebounding.
- The Vanguard Information Technology Index Fund ETF Shares offers targeted exposure to technology stocks, with Apple and Microsoft making up a significant portion of the fund.
- Positive technical factors and seasonality trends suggest a potential rally for VGT and tech stocks in the coming months.
The seasonally weak period that generally begins in late summer and lasts through September certainly did not disappoint the bears this year. We've seen high-single-digit declines in the major stock indices during that period in 2023, and it's brought the bears out of hibernation, claiming a crash is coming. That tends to happen whenever we get pullbacks, but I'm looking at the evidence objectively, and I simply don't see it.
Tech is already rebounding, and while there's a lot of work left to do for the bulls to regain control of this market, if it's going to happen, it's likely to happen very soon.
One way to take advantage of this is through the concentrated exposure offered by the Vanguard Information Technology Index Fund ETF Shares (VGT), which we'll profile below. The October/November period is one of the best times to own technology during the year, and given we're facing oversold conditions during this pullback, I'm ignoring the perma-bears and looking to add exposure at cheap prices.
What is VGT?
In short, VGT offers targeted exposure to technology stocks. This is not a diversified fund; quite the opposite.
Seeking Alpha
Apple makes up 22% of total holdings, and Microsoft is another 16%+. That means more than 38% of the fund is invested in just two stocks, so if you're looking for a diversified fund, look elsewhere. However, I've said on many occasions here on Seeking Alpha that I actually prefer targeted funds because diversification guarantees that a part of your holdings will underperform. What we're looking for here is outperformance, and in my view, we're likely to see tech perform very nicely in the next couple of months.
VGT owns 321 stocks, so its list of holdings is huge. However, the top 10 make up about 59% of the fund, while the other 311 make up just 41%. Again, this is about targeted mega-cap exposure. And, as you can see above, this is not a value fund. These are high-growth names with an average P/E ratio of 33.1X, but an average earnings growth rate of 25%. Despite these factors, there's a very low turnover of just 6%, and as we can see below, this fund is dirt-cheap.
Fund website
The fund charges just 10bps annually, which is very close to nothing, so it certainly checks that box. So, we have a fund that's extremely cheap to own, has low turnover, and offers targeted exposure to a group that I think is set to rally. Sounds pretty good, but let's take a look at the technical factors to see if the bull case is fully supported.
Much to do for the bulls
I mentioned the summer is generally weak for equities, and that's true for tech stocks as well. Since the July top, we've seen VGT fall from $461 to its close at $418 yesterday, a move of nearly 10%. That's a significant bout of selling, particularly since it's taken place over the course of almost three months. However, we're looking at a very bullish period seasonally coming up, so I'm willing to look past some weakness on the chart. But before we get to that, let's have a look at the price chart.
I've drawn in a channel that began forming in July, and it's unequivocally bearish. The very first order of business is for the bulls to push VGT up and out of this channel, the top of which is currently about $440. Unless/until that happens, VGT is technically in a downtrend.
On the plus side, the PPO is showing not only a positive divergence, but it's doing so while the histogram is making a bullish crossover, and it's oversold. Basically, the confluence of these factors means that momentum is improving right at the time you'd want it to, and the new price low that was set a few days ago was not confirmed by momentum. That is no guarantee, but it often portends a trend change. We'll have to wait and see if this time is different, but we look good for a potentially significant bounce here.
I've mentioned seasonality, so let's take a look at that now. Below are the past five years of returns broken out by month, and it paints a very bullish picture, in my view.
September is awful , averaging 4.1% losses in the past five years. The 2023 edition of September was much worse than that. However, that sets us up all the better for the positive returns of October, and the extremely nice average returns in November. As I said, none of this is some sort of guarantee, but if there were guarantees in investing, we'd all be billionaires.
Top component analysis
Since this fund is concentrated, we can gain some insight into potential future performance by looking at the top components. We'll start with the mega-cap tech stock OG, Apple, which is more than one-fifth of the fund.
We see a similar downtrend pattern in play here, but on the plus side, the positive divergence on the momentum indicators is much more pronounced. That makes it a lot more likely, in my view, that Apple's downtrend is much closer to the end than the beginning.
From a seasonality perspective, Apple actually has much better returns in October than in November, which is the opposite of VGT.
October has only been positive for three of five years, but average returns are strong at +3.8%, with November and December slightly positive. Is this a slam dunk? Absolutely not. Is it leaning bullish? Absolutely, yes.
Microsoft has a slightly different look, as it hasn't broken key support (yet) which would signify a larger downtrend.
That key support level is ~$310, which we can see held a few days ago, and has thus far produced a very strong reaction from the bulls. The positive momentum divergence is alive and well here too, so again, the bulls have a shot to take control. They'll need to clear ~$330 to negate the lower highs we've seen since July, which means there's still significant work to do.
Seasonality looks the best for Microsoft (compared to Apple and VGT itself) with October and November averaging +7.3% returns in the past five years.
October has a boom or bust feel for Microsoft, as only two of five years were positive, but averaged +2% returns. Again, given we're in the midst of a pretty sizable pullback, the odds favor the bulls here for a seasonally-driven rally. We shall see.
Wrapping up
I cannot tell you if tech stocks or any other group of stocks will rally into the end of the year; nobody can. However, I use technical analysis because it takes the emotion out of investing decisions, and right now, the objective evidence suggests the path of least resistance for tech stocks in the next couple of months is higher. That's good enough for me, and it's good enough for me to put a buy rating on VGT.
Now, all of that goes out the window if we see support levels break down, so we never just buy and hold our nose; be disciplined. That support level for me is the bottom end of the channel on VGT's chart above, because if that breaks, look out below. I don't think that's going to happen, and I think VGT is a good buy here from a risk/reward perspective.
For further details see:
VGT: Tech Stocks Poised For A Santa Claus Rally