Is Telecom Chart Calling For Higher Prices?
The often over-looked telecom sector has broken out to 9-year highs.
Recently, we posted a longer newsletter piece on our firm’s site (as well as on See It Market) titled “Stay Of Execution For The Bull?”. It discussed several developments occurring since the February bottom in stocks that caused us to upgrade our expectations of the rally – and the present status of such developments. While our view continues to be that the post-February bounce is a “bear market rally”, the manner in which the rally unfolded suggested it would be more than merely a dead-cat bounce. Indeed, it was. And despite our very recent slightly diminished level of bullishness, there continues to be plenty of positive action among various sectors of the market. Included among them is the telecom sector.
Telecom stocks, for some reason, often seemed to be overlooked – at least they have that tendency with us. Perhaps it’s because they aren’t flashy and can be prone to long periods of inactivity. That said, in most ways, they still trade like any other sector, i.e., based on cycles, supply-demand, fear-greed, etc. (oh, and fundamentals too, perhaps). Therefore, they will display bullish or bearish technical characteristics like any other group. Lately, they have been moving in a bullish fashion.
After rallying for several years, from the 2009 lows into 2013, the group stagnated, essentially moving sideways for the past 3 years. Earlier this year, the group broke out above the top of that 3-year range, as demonstrated in the chart below by the Dow Jones U.S. Telecommunications Index. As is often the case, particularly in recent years, after a pop higher following the breakout, the index retraced its gains and dropped back to “test” its breakout level. The index emphatically passed that test, bouncing strongly off of the breakout level. And in the past few days, not only has it moved to new rally highs, it is at the highest level since 2007.
Now, this isn’t one of those “here’s an awesome entry point!” posts. Obviously the point of the breakout test (roughly 7%-8% lower) would have been the ideal spot from a risk-reward standpoint (FYI, we did post charts on Twitter and StockTwits at that time of a telecom ETF testing its breakout level; follow us there @JLyonsFundMgmt for more of those timely charts). This post has a few other purposes.
First, while our optimism toward the current broad market rally has been downgraded to some degree, this chart represents just one of still plenty of bullish data points and behavior in the market. Secondly, as it specifically pertains to the telecom area, this is one of several sectors still behaving constructively. Yes, the new high in the sector is the best thing going for it. However, another positive is that it continues to behave as it “should” according to its technicals (e.g., its successful test of the breakout level). When a sector or market behaves as it “should”, we can have more confidence in both our interpretation of its action, and in our expectations for its behavior.
Is this post a signal to go out and jump into the telecom sector? No – none of our posts should be construed as advice to invest in any particular vehicle or manner. Furthermore, while the new highs are great, especially if one already owns the sector, new highs have not been as reliable in displaying follow-through as they used to be. In fact, as often as not these days, it seems that tops are made following moves to new highs, not due to rejections at former highs. That is one possibility, by the way, pertaining to the major averages that we continue to ponder.
We are not saying this is negative action here in the telecom sector in any way. Indeed, there is nothing more bullish than new highs. However, the risk/reward is not as favorable as it was at the point of the initial breakout, or upon its test. If the sector does continue higher, as all conventional indications would suggest, the next potential major resistance may come near the 2007 highs around 196, or about 6% higher.
Therefore, while we may not be buyers of the group right now, as investors already, we could understand continuing to hold a position in the telecom group with the hopes that it will continue dialing up new highs.
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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.
