Tech Sector's Sell-Off Point Is Approaching

by: Gold Digger

Nasdaq has run higher in the past seven sessions straight, with Nasdaq 100 gaining more than 6% in the past seven trading days. Compare that to the yield on 10-year treasuries hovering near 3%. Tech sector trading is now looking very crowded, as all the yield seekers pile into the sector.

Most of the major contributors in the Nasdaq 100 have gained too much in this short period, with Google (NASDAQ:GOOG) up 10%, Apple (NASDAQ:AAPL) up 10%, Priceline (NASDAQ:PCLN), Microsoft (NASDAQ:MSFT) and Baidu (NASDAQ:BIDU) also contributing to the gains. However, as these stocks price-in the best earnings scenario, the Nasdaq composite is looking toppy here.

We are concerned about Netflix (NASDAQ:NFLX) in particular, as the company's stock ran up almost 10% in just two days on the news of expansion plans into Latin America and Caribbean. However, looking at Netflix's business model, we wonder why the company wants to do that while it is not making big money in its primary market, here in the U.S. Netflix seems to be playing a trick on investors, as they worry about customer count while completely ignoring the other side of the equation-- the cost associated with customer acquisition. There is a tendency among tech sector investors to reward investments by the firm with a fake promise of future earnings potential. This is because-- unlike any other industry-- the cost of switching for customers from a tech company is almost negligible.

Though there is no cheap service like Netflix around at the current time, if another ponzi schemer (who doesn't care about the cost to the company) offers me $6/month unlimited movie streaming, I'll definitely switch immediately. Assuming every logical customer will do the same, I don't understand how long Netflix will be able to justify these huge investments if it is not striking exclusivity contracts with its content providers.

The same logic applies to cloud service offerings. While the cloud does have slightly higher switching costs than a DVD rental and streaming service, that cost is still not that high due to the whole model of cloud. So Amazon (NASDAQ:AMZN) justifying cloud investment does not make sense either.

In the current yield fishing environment, yield seekers are willing to ignore business models for the sake of extra yield. This reality will come to bite investors sooner rather than later. Sometimes gaining 4% is much better than losing 50%. We should always be aware of the competition in the tech sector, as well as in our investments. We are advising investors to start taking profit in the above mentioned technology names before the rally fizzles out. There will soon be better opportunities to get into these names at a much lower price point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.