Chart Master: Time to trim tech positions

Key Concepts

• Silver Supply/Demand: Significant deficit in silver supply versus demand, unlike gold.
• Relative Performance: Tech sector’s relative performance peaked October 30th, entering a third month of underperformance.
• Technical Analysis: Utilizing chart patterns (Head and Shoulders, Trend Line Breaches, Converging Trend Lines/Wedges) to predict future price movements.
• Underweight Technology: Investment strategy recommending reducing exposure to the technology sector.
• Alpha: A measure of performance on a risk-adjusted basis; the software sector demonstrates “no alpha.”

Silver Market Dynamics

The discussion begins by highlighting a critical imbalance in the silver market. There’s a substantial annual deficit – estimated at “million to 300,000,000oz per year” – between silver supply and demand. This contrasts sharply with the gold market, which doesn’t exhibit the same supply-demand pressures. This deficit suggests potential for price increases in silver due to fundamental market forces.

Tech Sector Underperformance & Technical Analysis

The conversation then shifts to the technology sector, specifically focusing on the iShares Expanded Tech Software ETF (IGV). Concerns regarding the impact of Artificial Intelligence (AI) on the industry have led to a decline of “over 2%” for the ETF. A “Chart Master” has reiterated a January 5th recommendation to “be underweight the tech sector,” advising clients to reduce long positions and increase short positions.

Carter Braxton Worth of Worth Charting provides a technical analysis of the situation. He emphasizes that the tech sector’s relative performance peaked on October 30th, marking the beginning of a three-month period of underperformance compared to the broader market. Within the tech sector, software is experiencing the most significant downturn.

Worth presents a multi-faceted chart analysis of the IGV ETF, utilizing three different perspectives:

1. Potential Top Formation: The chart exhibits elements indicative of a market top, potentially resembling a “Head and Shoulders” pattern, signaling a reversal.
2. Trend Line Breach: A well-defined trend line, established since the “tariff low,” has been breached, further confirming a bearish outlook.
3. Converging Trend Lines (Wedge/Triangle): The chart displays converging trend lines, often referred to as a triangle or wedge, which Worth believes sets the stage for continued poor relative performance.

He states, “It’s the definition of no alpha,” referring to the software sector’s inability to generate returns above the market average. His initial research report for the year advocated for an “emphatic” “underweight technology” stance.

Identifying Weakness Within the Tech Sector

The discussion then focuses on identifying the weakest stocks within the software sector. Several companies are mentioned as being “flat on their back,” including Snowflake, Workday, and CRM (Salesforce). However, the consensus is that Microsoft is the most critical stock to watch.

Worth explains, “I think that maybe the way to answer that is the most important, of course, is Microsoft. And it is such a… so heavy here, acts so poorly. I think that’s the one obviously to watch.” He emphasizes Microsoft’s significant market capitalization and influence, stating that its poor performance is particularly concerning. The performance of other key names like Meta and Netflix are also noted as relevant.

Logical Connections & Synthesis

The conversation establishes a clear connection between macroeconomic factors (silver supply/demand) and sector-specific analysis (tech underperformance). The technical analysis presented by Carter Braxton Worth provides a framework for understanding the current market conditions and potential future movements within the tech sector. The identification of Microsoft as a key stock to monitor highlights the importance of focusing on industry leaders when assessing overall sector health.

The main takeaway is a cautious outlook on the technology sector, particularly software, supported by both fundamental concerns (AI disruption) and technical indicators (chart patterns and relative performance). The silver market discussion, while brief, suggests a potential investment opportunity based on supply-demand dynamics.