Technology Outperformance Should Continue

Jul. 8.09 | About: Technology Select (XLK)

A jobless recovery may be in the works but companies are finding technology spending a need rather than a want. Technology stocks have outperformed the broader index this year and that trend could continue for some time.

The worst of the recession has passed, and companies are starting to spend again, judging by the rise in new technology orders relative to inventories in the latest durable goods report according to BCA Research.

Technology companies shed labour at a much faster rate than the broader market at the start of the year, but that trend has reversed course in the second quarter as order books picked up.

At the bottom of the market, negative earnings revisions for technology companies outnumbered positive revisions by roughly 400 to 1, according to BCA and that too has changed with positive revisions outnumbering negative revisions by a substantial margin.

The technology industry has been through years of consolidation says Merrill Lynch with the number of companies halved since 2000. As a result, the computers and electronic equipment segment has the highest rate of capacity utilization out of the entire durable goods sector. Therefore, profitability will return fastest to technology companies once production rises and that could be imminent.

There are both secular and cyclical forces behind technology stocks and investors should stay long this trade.