Tech Chasers Tread on Thin Ice

This column was originally published on RealMoney on Sept. 12 at 12:41 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

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 Quote) and SPDR Trust(SPY Quote) 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.

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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.

Can the market still bail itself out and get the broad sponsorship it needs for a sustained rally to new highs? Circling back to my first notes, it's obvious the future depends on the Nasdaq and tech stocks.

Thursday was the first session this month in which Nasdaq volume exceeded NYSE volume. This is an important statistic to follow in the days ahead. The market needs speculators to move higher -- these folks prefer the Nasdaq, so exchange volume needs to rise and stay above the NYSE's, or the broad rally will fizzle out.

Semiconductors

How are the semiconductors performing in light of the challenges faced by the tech universe?

They had a good session Thursday, as traders bid up the group ahead of midquarter updates from Intel(INTC Quote) and Texas Instruments(TXN Quote).

But a sell-the-news mentality hit the tape on Friday.

Ominously, the Semiconductor HOLDRs Trust(SMH Quote) exhibits the same bearish divergence suffered by the other exchange-traded funds at this time. Notably, accumulation hasn't budged in the past two weeks, despite the rally from $36 to $37.70. This suggests that silent hands are selling into this uptick.

Fortunately, momentum indicators still point to higher prices in the short term, so the SMH could test its summer highs soon. But upside volume needs to pick up considerably or sellers will use those levels to take profits and enter aggressive short positions.

It's doubtful that the coming week will help traders make the right choices about tech stocks. It's triple-witching time, and both sides of the market may be targeted equally for pain. But critical issues for this rally will move to center stage as we head into the second half of September.

Names on the Move

Finally, let's highlight seven subgroups that have been leading the tech sector in the past few weeks. Their outperformance should continue if tech gets the upside volume injection it sorely needs.

Tech Leaders These subgroups have outperformed and could continue to do so
Rank	Subgroup	Group Leader
80	Communication Equipment	Corning (GLW)
79	Electronics-Wholesale	Brightpoint (CELL)
76	Electronics -Stores	GameStop (GME)
72	Wireless Communications	America Movil (AMX)
72	Semiconductor-Broadline	Advanced Micro Devices (AMD)
68	Technical & System Software	Autodesk (ADSK)
62	Business Software & Services	Redback Networks (RBAK)
Source: TC2000

The rankings show each group's ability to trade over its 200-day moving average. In general, these top performers show mediocre numbers compared with nontech sectors. This shouldn't be a surprise, given the divergences highlighted in this column. Of course, tech bulls hope these rankings will improve considerably in the coming weeks.

One aspect of tech performance rises to the surface whenever the sector moves higher: How are the big guns performing? Will they reassume their leadership mantle? In Tuesday's column, I'll look at the four tech horsemen of the 1990s to see whether they're helping or hurting this embryonic rally.

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