The average technology fund gained 5.1% in the five days through yesterday on optimism of a rebound in earnings and the economy. But that was before Microsoft ( MSFT) plunged as much as 11% today after reporting a 29% decline in profit. Microsoft was hit with a double whammy in the second quarter. As the economy shrank, demand for Web site advertising weakened and the price of banner ads slipped. Also, cash-strapped consumers and businesses held off purchases of new PCs in advance of a new version of the Windows operating system slated for October delivery. The best-performing fund, Direxion Daily Technology Bull 3X Shares ( TYH), returned 15% in the five trading days under review. The fund is 300% leveraged to the daily performance of the Russell 1000 Technology Index whose key members include Microsoft, International Business Machines ( IBM), up 4.6%; Apple ( AAPL), up 7%; and Cisco Systems ( CSCO) up 8.8%. IBM is launching a secured, Web-based file-backup service throughout Europe called Vaulten. And Apple is reluctantly benefiting from a rival device maker, as Palm ( PALM) updated its Palm Pre software to allow downloading of songs from Apple's iTunes. The second-best performing fund, Ultra Semiconductor ProShares ( USD), 200% leveraged to stocks in the Dow Jones U.S. Semiconductor Index, jumped 12%. The largest percentage gainers of this group include pops of 27% in Cohu ( COHU), 25% in DSP Group ( DSPG) and 15% in MEMC Electronic Materials ( WFR). All three of those companies beat earnings expectations this week.
The worst-performing technology funds this week all short the sector with 200% negative leverage. The largest declines were minus 13% in Rydex Inverse 2X S&P Select Sector Technology ETF ( RTW), minus 11% in ProShares UltraShort Semiconductors ( SSG), minus 9.7% in ProShares UltraShort Telecommunications ( TLL) and minus 9.3% in ProShares UltraShort Technology ( REW).
The disappointing quarter by Microsoft, knocking the technology sector down a peg, presents a potential buy-on-the-dip opportunity if the economy continues to recover through the fourth quarter and into next year. For more information, check out an explanation of our ratings.