Taking A Long Look At Internet Stocks
Given the carnage that unfolded across equity markets during the 3rd quarter, it is difficult to find attractive long setups among the various indices and sectors. Although, there actually are quite a few that have fallen so far that they are brushing up against potentially interesting longer-term chart levels. What I should say is that it is difficult to find attractive looking setups that did not incur extraordinary technical damage to get there. One possible candidate is the internet sector.
Using the Dow Jones U.S. Internet Index as a barometer, we see that the sector has suffered relatively little technical damage on the chart. True, it is off some 10% from its peak of a few months ago; however, it is a higher-beta sector. Considering that fact, compared with the 20%-30% drops among some other sectors, that isn’t too shabby. More importantly, none of the key levels on its chart have been breached. In fact, it is one of the few indices that did not drop below its 200-day moving average during the recent decline.
What we see currently is that the DJ U.S. Internet Index is testing the top of an ascending triangle that had formed over the course of the last 18 months.
This pattern of lateral highs and higher lows is generally a bullish chart pattern, i.e., more times than not, prices will break out above the top of the triangle rather than below the lower up-sloping line. Indeed, in July, the index broke out above the tops of the ascending triangle that had formed in March and September of 2014 and March of 2015. The recent weakness, in both August and the past few days, has taken the index back to those tops.
One problem in extrapolating an upside target from the ascending triangle is that…it already achieved the target in July. Therefore, that certainly takes some of the thunder out of the fact that the index is above the prior tops. However, the condition of being above any prior levels is a feather in the cap of any sector or index in this market.
So it’s pretty straightforward. Provided the Dow Jones U.S. Internet Index can remain generally above the former highs, that level can be used as a support area to play off of. Conversely, should this level fail to hold, or more importantly, should the up-sloping line of the ascending triangle fail to hold, the “support” will have to be deemed a failure.
On a more general level, our philosophy in deciding what to invest in is based on the concept of relative strength. That is, we want to be concentrated in the stronger areas of the market, rather than trying to catching falling knives or buy cheap stuff that invariably gets cheaper. This philosophy applies no matter what type of market we are in. Thus, even though the market has been slaughtered this quarter, some areas have been slaughtered less. Those are the areas we want to focus on from the long side. And, at least for the moment, the internet sector is one of them.
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More from Dana Lyons, JLFMI and My401kPro.
The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
