Tech Chasers Tread on Thin Ice

Tech traders are chasing the tape every time the market lifts a few points. These folks have moved into full-gear reaction mode, obviously nervous they're going to miss the big move. But this isn't 1999, and tech stocks aren't the leaders they used to be.

Years of mediocre performance haven't stopped this crowd from jumping on the usual suspects one more time. This unrequited love has been a strange byproduct of rallies big and small since the bubble burst. It seems every time the market turns higher, tech traders come out of the woodwork to throw money at the same tired old plays.

History tells us that sectors leading one bull advance rarely lead the next one. It's the nature of market inefficiency to find new leadership and not reward the same old stocks that worked in the past. Of course, tech bulls are hoping it's different this time around.

But there's little evidence in this two-week rally to support their bullishness. Look at relative performance between the Nasdaq 100 Trust (QQQQ - commentary - Cramer's Take) and SPDR Trust (SPY - commentary - Cramer's Take) during this period. It confirms that tech stocks have been lagging the blue-chips badly.

Note how the poor showing contrasts with rallies off the August 2004 and April 2005 lows. In both cases, technology took over leadership immediately and retained that crown until the rallies ended. That hasn't happened this time around, at least to this point in time.

The real culprit is upside volume. The expected increase in volume hasn't appeared during this rally, despite the passing of the dog days and post-Katrina volatility. As a result, technical indicators now signal bearish divergences in accumulation and investor sponsorship.

This disturbing graphic should pour cold water on bullish enthusiasm, at least for the next few weeks. On-balance volume (OBV) has hardly budged off the August lows, despite a rally that's taken the SPDR Trust back to its summer highs. The sharp divergence predicts this uptick ultimately will fail.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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