What the Market Wants: Technology Stocks Under Siege

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Includes: AAPL, DIA, GOOG, IVV, QQQ, SPY, VTI
by: David Brown

Here we are again wondering what the market wants. Monday, it clearly wasn't Technology stocks, as various issues dragged both Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) lower. Apple has been hurt by the likelihood of rising supplier costs from its Chinese supply chain related to the poor working conditions issue. In addition, the Federal Government, along with 15 states, announced an anti-trust suit against Apple and a number of book publishers for price collusion. If successful, the suit would lower e-book prices, favoring Amazon and hurting Apple due to its alleged collusion with the book publishers.

Google, meanwhile, faces a significant lawsuit of its own from Oracle (NASDAQ:ORCL) over its alleged use of Java technology in Androids. Separately, the FCC fined Google over its alleged violation of privacy rights from its Street View service. And if all of that was not enough, institutional shareholders are raising concern over Google's 2-for-1 stock split last week, since the new shares will not carry voting rights.

Since both Apple and Google have recently hit new highs, it is not that surprising that these issues, which in total are unlikely to have very serious effects on either company, could indeed generate a wave of profit taking.

It was a bit of an odd day with the DJIA up 70+ points and the NASDAQ losing over 23 points while the S&P 500 "sat" there finishing nearly "dead even" (-0.7%). But it does conclude another week of losses for the S&P, now nearly 3% off its high two weeks ago of 1422.

Globally, we're still faced with a lot of "small" problems. Although none by itself is a cause for alarm, how many times can you say "small problem" before the aggregate "small problems" become a large problem? Spain continues to flounder with bond yields rising back to dangerous levels. Stability in Egypt is wavering. Ditto for Afghanistan and Pakistan. After last week's embarrassing rocket launch failure, Korea may decide that it needs to prove its competence by testing another atomic device. There's a lot to worry about but still a paucity of alternatives to the equity markets for decent returns.

Valuations still seem reasonable against historical norms. Basic Materials and Financials are both oversold due to legitimate concerns that may have driven their respective sector prices too low. Consider the strength in Monday's Financial sector led by Citigroup (NYSE:C), up nearly 2%, despite missing all their numbers, and last week's strong reports by JP Morgan (NYSE:JPM) and Wells Fargo WFC).

Monday's retail sales report for the retail group was pleasing, rising 8% versus an estimated 0.3% and last month's 1%. With corporate cash still at record levels, it is likely that we will see continued acquisition's such as Merck's (NYSE:MRK) move today to buy Endocyte's (NASDAQ:ECYT) rights to Vintafolide, a new cancer drug in trials. The price tag was about $1 billion! Our forward-looking sector model's top three are Financials, Healthcare and Basic Materials.

The remainder of this week will include a plethora of big-name industries across the board. Tuesday morning, includes Ameritrade (NASDAQ:AMTD), Goldman Sachs (NYSE:GS) and State Street (NYSE:STT) from the Financial Sector, and Johnson & Johnsons (NYSE:JNJ) from Healthcare. While under siege, the Technology sector will feature releases from Intel (NASDAQ:INTC), IBM, Seagate (NASDAQ:STX) (a Sabrient Baker's Dozen 2012 pick), and Yahoo (NASDAQ:YHOO).

Economic releases this week feature most of the housing industry data, industrial production tomorrow, initial jobless claims and the Leading Economic Indicators on Thursday.

While we await the reports of this week and the weeks to come, we continue to seek undervalued large- and mid-cap stocks and recommend hedging with European ETFS such as VGK, IEV, and/or EWP.

Here are the market stats.

4 Stock Ideas for this Market

This week, I used the GARP preset search in MyStockFinder with an added focus on recent upward analyst revisions:

HollyFrontier Corporation (NYSE:HFC)-Energy
Chemtura Corporation (NYSE:CHMT)-Basic Materials
Discover Financial Services (NYSE:DFS)-Financial
Delta Airlines (NYSE:DAL)-Industrials