Technology ETF: No. 3 Select Sector SPDR Over 2014's First 9 Months

| About: Technology Select (XLK)

Summary

The Technology exchange-traded fund ranked third by returns among the nine Select Sector SPDRs during the first three quarters of 2014.

The ETF ranked fifth by the same metric among the sector SPDRs over the first half of this year.

Seasonality analysis indicates the ETF’s fourth quarter is its strongest of the year. But I doubt it will be in 2014.

The Technology Select Sector SPDR ETF (NYSEARCA:XLK) in the first three quarters of this year ranked No. 3 by returns among the Select Sector SPDRs chopping the S&P 500 into nine morsels. On an adjusted closing daily share-price basis, XLK ascended to $39.90 from $35.27, a climb of $4.63, or 13.13 percent. XLK therefore performed better than its parent proxy SPDR S&P 500 ETF (NYSEARCA:SPY) by 4.96 percentage points, but worse than its sibling Health Care Select Sector SPDR ETF (NYSEARCA:XLV) by -3.39 points. (XLK closed at $38.05 on Friday.)

XLK ranked No. 2 by returns among the sector SPDRs in the third quarter, as it lagged the period's leading XLV by -0.97 percentage point and outpaced SPY by 3.34 points. And XLK ranked No. 4 among the sector SPDRs in September, as it lagged the month's leading Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) by -1.10 percentage points and surpassed SPY by 0.86 point.

Comparisons of changes by percentages in all nine sector SPDRs and SPY during 2014's first nine months, over the third quarter and in September can be found in charts here.

Figure 1: XLK Monthly Change, 2014 Vs. 1999-2013 Mean

Source: This J.J.'s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance.

XLK behaved much better in the first nine months of this year than it performed in the comparable periods of its initial 15 full years of existence based on the means calculated by employing data associated with that historical time frame (Figure 1). The same data set shows the average year's weakest quarter was the third, with a large negative return, and its strongest quarter was the fourth, with an even larger positive return.

Despite the seasonality of XLK, neither major central bank policies nor related moves in the euro and U.S. dollar currency pair, or EUR/USD, appears likely to help its sector's behavior this quarter. As discussed recently with respect to PowerShares QQQ (NASDAQ:QQQ), I thus anticipate a narrowing of the performance gap between the overall equity market, as represented by SPY, and the technology sector, as represented by QQQ and XLK.

My expectation is based partially on the action in the currency market related to the bias divergence in monetary policy that has the U.S. Federal Reserve oriented toward tightening and the European Central Bank oriented toward loosening. This divergence was obvious at the 2014 Economic Policy Symposium hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo., in August.

But the central banks' biases became increasingly apparent even earlier in the year, as EUR/USD fell from as high as $1.3992 on May 8 to as low as $1.2499 on Oct. 3, a tumble of -$0.1493, or -10.67 percent, based on data at StockCharts.com.

This change in the EUR/USD cross and corresponding moves in other currency pairs indicate earnings in the fourth quarter of U.S. publicly traded companies in sectors with substantial international businesses could reflect the effects of a stronger dollar.

Of course, many technology companies fit this description, and, in terms of exposure to either the tech or the telecommunications sectors at this time, the Select Sector SPDRs' online site reported XLK's is basically 100 percent.

Figure 2: XLK Monthly Change, 2014 Versus 1999-2013 Median

Source: This J.J.'s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance.

XLK behaved much better in the first nine months of this year than it performed in the comparable periods of its initial 15 full years of existence based on the medians calculated by using data associated with that historical time frame (Figure 2). The same data set shows the average year's weakest quarter was the third, with a relatively small positive return, and its strongest quarter was the fourth, with an absolutely large positive return.

With the Federal Open Market Committee probably announcing the end of the Fed's current quantitative-easing program, aka QE3+, as soon as Oct. 29 and possibly announcing the beginning of its interest-rate hikes as soon as April 29, XLK may find it difficult to book the same kind of gains in the fourth quarter as it recorded in the other three quarters of this year.

Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author's best judgment as of the date of publication, and they are subject to change without notice.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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