Groundhog Day in Tech Funds... If Summer 2011 Repeats 2010 (XLK, QQQ, HHH, SMH, TYH, TQQQ, SOXL)

Following a pretty steady climb since August 2010, the NASDAQ peaked in late April before tumbling almost 9%. The tech-heavy index is trying to start over again, but it’s a bumpy hill. It’s trading today at more than 100 points higher than its lowest point earlier this month, and that means that there ought to be some movement in tech stocks.

The funds that follow the tech sector should also be gaining some ground, and we’re going to look at a few: the Technology Select Sector SPDR (NYSE: XLK), the PowerShares QQQ (NYSE: QQQ), the Internet HOLDRS (NYSE: HHH), the Semiconductor HOLDRS (NYSE: SMH), the Direxion Daily Technology Bull 3X Shares (NYSE: THX), the ProShares UltraPro QQQ (NYSE: TQQQ), and the Direxion Daily Semiconductor Bull 3X Shares (NYSE: SOXL).

We have to wonder if this summer is going to be a repeat of last summer.  The markets started out weak because Greece was rioting, the economic recovery was softening, inflation was a concern.  From the end of April we saw a drop up to around the 4th of July weekend.  Then came a bounce, but the markets drifted lower into August before the big move higher came.  It could be Groundhog Day, or it could just be a trap.

The PowerShares QQQ ETF (NYSE: QQQ) is the largest tech fund, with nearly $22 billion in assets. Nearly the entire tech component of the S&P 500 is represented in this fund. The growth driver in the tech sector for the last six months or so has been smartphones, and the next big thing is likely to be cloud computing although smartphone demand continues to be strong. The fund holds a 3-star rating from Morningstar.

The Technology Select Sector SPDR ETF (NYSE: XLK) is holds total assets of about $7.3 billion. The Morningstar analyst notes that this fund and QQQ demonstrate a 98% correlation over the past five years. XLK does not include exposure to non-tech stocks in consumer discretionary, health-care, biotech, or industrial assets, as does QQQ. The fund carries a 3-star rating from Morningstar.

The Internet HOLDRS (NYSE: HHH) does not track an index and only deletes stocks from its holdings when a company is sold or folds. It never adds companies. Its total assets amount to about $128 million, and just three companies account for more than 75% of the fund’s assets: Amazon, E-bay, and Yahoo. The fund is not yet rated by Morningstar.

The Semiconductor HOLDRS (NYSE: SMH) holds assets totaling about $515 million in just 18 stocks. The fund’s top 10 holdings account for 86% of its assets. Like HHH, stocks are only deleted, never added. As semiconductor book-to-build ratios improve to round 1, investors typically get more interested in SMH. Morningstar does not rate this fund.

The Direxion Daily Technology Bull 3X Shares ETF (NYSE: THX) is a triple-leveraged that seeks daily results of 300% the price performance of the Russell 1000 Technology Index. It’s largest stock holdings are virtually identical with QQQ and XLK, although in much smaller weightings. During its first year of operation, 2009, the fund returned 245%. Last year, returns totaled 21.28%, and so far this year returns are given as 6.81%. The fund is unrated by Morningstar.

The the ProShares UltraPro QQQ ETF (NYSE: TQQQ) is another triple-leveraged fund seeking to match the daily results of the Nasdaq 100 index. Its one-year return is 69.7%, and its year-to-date return is 1.27%. The fund’s assets total about $124 million and it is not yet rated by Morningstar.

The Direxion Daily Semiconductor Bull 3X Shares (NYSE: SOXL) is another triple-leveraged fund, this time seeking 300% of the price performance of the PHLX Semiconductor Stock Index. The fund began operation in early 2010, and its trailing return is 20.42%. Year-to-date annual return is 14.52%. The fund is not rated by Morningstar.

When you look at the current share prices for these funds compared with 200-day moving averages, you notice that HHH has taken a solid bounce to gain about 6.8% since mid-June. The QQQ and XLK funds are finally pushing through their 200-day moving averages, but have yet to establish a solid foothold above that mark. SMH has spent just one full day above it’s 200-day moving average since mid-June, but it appears that it might do it again today.

Of the three leveraged funds, only TQQQ has managed to punch above its 200-day moving average since mid-month, and that is only today. TYH and SOXL both passed through that mark on their way down in early June and haven’t recovered yet.

The leveraged bull funds have some room to run, but haven’t yet taken advantage of it.  Last summer saw the same sort of start

Paul Ausick

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