One very good trend that Im seeing this earnings season is a strong resurgence in business conditions among small-cap technology companies. This strength is occurring in the semiconductor industry as well as in the networking and telecommunication sectors. Its a good sign for the domestic economy and business outlooks are improving.
Because the stock markets been so strong lately, most of the small-cap technology companies that are reporting good news have already experienced major upward price moves in their shares. There isnt a lot of value out there and this makes life a lot more difficult for stock-pickers. Most of the trades in the marketplace now are momentum trades and, while this kind of action can be profitable, you have to be ready to jump ship at any time. Momentum investing isnt easy.
Many analysts, including myself, expected the technology sector as a whole to do much better than it did last year. The recovery in corporate IT spending definitely took longer than most people thought, even though big companies have been sitting on piles of cash. With corporations now spending on equipment and services, and consumers buying at the retail level, theres a trickle-down effect taking place and its great for the small-cap technology sector.
But again, I come back to the investors view. Business is getting better and thats great. But, where are the good investment opportunities? Where can I buy low with the goal of selling higher? The answer is that you cant very easily in this market. Were not in a new bull market. This is a bear market rally.
So, I want to reiterate a previous point about playing the market rather than playing individual stocks. In this kind of environment, with the current outlook and current monetary policy, trading the market seems to me like a worthier strategy than trying to pick individual stocks. Sure, there are great stocks out there to own, but Im saying that the probability of generating successful returns now favors buying and selling the market, rather than individual stocks, which, for the most part, have already gone up in price.
Ive been saying for months that investors should be long and I maintain this positive outlook for the near term. Investors want to be buyers in this market, because theres nothing else to invest in and theres a lot of hope for the future. The stock market is definitely due for a correction, however, so keep this in mind if youre buying and selling.