Big tech stocks have struggled in the past two weeks, with profit taking overwhelming buying pressure following a historic run that has lifted the tech-heavy Nasdaq-100 into a series of all-time highs. Many widely held issues have been sold aggressively during this period, raising doubts about sector resiliency in coming months. However, it's a different story at the other end of the capitalization spectrum, where small-cap tech continues to attract steady buying interest.
These lesser known stocks could offer outsized returns in the ongoing rotation, with sidelined capital on the hunt for new places to take speculative risk. Small-cap tech is a perfect place to consider exposure because the tech sector should end the year on a high note, lifting all capitalization levels, but this group is far less overbought right now. This subtle difference offers the twin benefit of immediate potential gains as well as longer-term tailwinds. (See also: Why Tech Stocks Will Surge Again.)
Applied Optoelectronics, Inc. (AAOI) started life at $10 in a September 2013 initial public offering and entered an immediate trend advance that unfolded in multiple waves into the 2014 high at $28.01. That level marked multi-year resistance, ahead of a downtrend that found support near $8.00 in January 2015. Committed buyers emerged during a May 2016 test at that level, yielding a new uptrend that reached multi-year resistance just after the November election.
The stock broke out in January 2017 and entered a momentum-fueled rally that stalled near $60 in March. A pullback into April got bought, ahead of an intermediate advance that reached an all-time high at $75.59 on June 6. The pullback since that time has paused at the 50-day EMA, which has triggered five upside reversals since August 2016. This analog predicts a bounce that has the power to reach the rising highs trendline, currently in the low $80s. (For more, see: Hot Stock Applied Optoelectronics Surges on Q1 Guidance.)
Upland Software, Inc. (UPLD) came public at $11.00 in November 2014 and entered an immediate downtrend that posted an all-time low at $5.89 in May 2015. The stock ground sideways in a broad trading range for the next 20 months, ahead of a breakout above resistance at the IPO opening print in January 2017. The stock has stairstepped to new highs since that time and is currently trading in the low $20s.
Price action since December 2016 has carved a trendline of rising lows on the log scale chart, with four successful tests at support. The stock topped out after hitting an all-time high at $24.24 on June 2, while the subsequent pullback has now reached the trendline. A bounce at this level could support a breakout above the most recent high and continued upside into channel resistance near $30. (See also: Upland Software Catches Eye, Stock Moves Up 5.2%.)
Teladoc, Inc. (TDOC) is a tech/healthcare hybrid that offers web-based connections to physicians and nursing professionals for a variety of ailments. It came public near $30 in July 2015 and entered a steep downtrend that continued into the March 2016 all-time low at $9.08. A test at that level two months later got bought, completing a double bottom reversal that has yielded a strong and persistent recovery wave.
The rally pushed above the IPO opening print earlier this month and entered a test of the historic high posted just one month after the offering. A breakout could trigger substantial upside because, for the first time in the stock's short history, there will be no overhead supply to inhibit buying power. On-balance volume (OBV) is cooperating with the bullish setup, lifting to an all-time high in a bullish divergence, predicting that the price will play catch-up in the coming weeks. (For more, see: Teladoc Q1 Loss Lower Than Expected, '17 View Intact.)
The Bottom Line
Big tech stocks are extremely overbought and in need of a long-term consolidation that shakes out weak hands. Meanwhile, small-cap tech has emerged as a sweet spot, with the power to capture a good share of the capital generated by profit taking in the sector's bigger siblings. (For related reading, check out: Examining the Tech Sell-Off.)
<Disclosure: The author held no positions in the aforementioned stocks at the time of publication.>