The Nasdaq-100 led broad benchmarks in the first quarter, driven higher by widely held tech stocks that underperformed through most of 2016. While the most popular plays have rallied into lofty levels that could trigger sizable second quarter pullbacks, secondary tech names could gain traction as market players take profits and look for lower-risk buying opportunities.
Fiber optics, semiconductors and software providers look like sweet spots in the hunt for second-quarter tech winners but it’s hard to make bad choices because the rising market has been floating all boats. Even so, first-quarter earnings season is likely to shake out a few bad apples so keep one finger on the exit button until your new positions prove their worth with solid results.
Linux software provider Red Hat, Inc. (RHT) beat fourth-quarter revenues while guiding fiscal year 2018 above consensus in this week’s earnings confessional, triggering a 4-point gap and high percentage rally to a 17-year high at $87.91. It’s been filling the gap while testing new support near $84.50 in the last three sessions and should bounce soon in a healthy follow-through rally.
The uptick has finally confirmed a breakout above the 50% retracement level of the 2000 to 2002 bear market decline between $151 and $2.40, opening the door to the .618 retracement in the mid-90s. Price action between that level and triple digits will likely attract selling interest in a two sided tape, so keep stops tight until the stock trades comfortably above $100. Once settled above that level, it can set its sights on the much larger challenge of rallying into the Dot.com high.
Apple, Inc. (AAPL) supplier Analog Devices, Inc. (ADI) broke out above the 2004 high at $52.37 in 2015 and tested new support for more than 18-months, ahead of a strong trend advance that reached with 22-points of the 2000 all-time high at $103. The rally stalled in the lower 80s in mid-February, giving way to a narrow trading range that’s still in force as we head into the second quarter.
The slow grind is approaching intermediate support at the 50-day EMA, with round number 80 likely to trigger a bounce that tests the February high at $84.24. More dynamic upside may wait until the stock mounts the 4-month rising trendline (blue line), currently near $87. At that point, a momentum crowd could choose to buy high and sell higher, triggering a vertical rally into triple digits and a major test at the 17-year-old high. The company reports earnings on May 18.
Flir Systems, Inc’s (FLIR) technological and military orientation offers a twin benefit to market players, given the Trump administration’s commitment to higher defense spending. It stalled just above $37 in 2011 at the tail end of a 2-year recovery wave and failed a breakout attempt at that level in 2014. The stock returned for a third visit at the end of 2016 and dropped into a sideways pattern that’s holding close to that resistance level.
This coiling action predicts a multiyear breakout that tests the 2008 all-time high at $45.49. The sky’s the limit once that level gets mounted, favoring a rapid advance that could offer outsized gain to well-timed long positions. Early trade entry ahead of a breakout makes perfect sense because the narrow trading range supports relatively tight stop losses in case of an unexpected downturn. The company reports earnings on April 26.
The Bottom Line
Big tech stocks have led the first quarter advance, with the most widely held names now overbought and in need of multiweek pullbacks. This technical positioning should generate a rotation into second tier sector components that have attracted less public attention than their more popular peers.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>