Six years ago, I won my fantasy football auction draft.
Then I lost the season.
The rules were simple. Everybody got $200 in fake money and had to fill 16 roster spots.
I had a plan. My plan was studs.
I bought three of the best players on the board, and I paid up for every one of them. When the third name came off the board, a guy across the table put his head in his hands.
I felt like a genius.
My roster read like an All-Pro ballot.
I finished 3-10.
The players weren’t the problem. They were terrific.
The problem was that I had spent $164 of my $200 on three players. That left me with $36 to fill 13 more spots.
Every Sunday, three guys played like superstars and 13 guys played like $2 waiver wire bait. Because that’s what they were.
The guy who won our league didn’t draft a single household name. I think about that season every time somebody tells me technology is where the money is.
You see, there’s a lesson in that fantasy draft that has nothing to do with football.
It is possible to be right about the best players — and still lose because you paid too much for them.
Tech Stocks Show Chinks in the Armor
Look at the last month…
XLK Falters in Last Month
From July 24 through yesterday’s close, the Technology Select Sector SPDR (XLK) returned 3.12%. The S&P 500 Index returned 3.50%. The Nasdaq returned 4.53%.
Tech lost… to both.
And it did not lose quietly.
XLK fell more than 5% in the first week of that window.
It ripped all the way to a gain of more than 8% by August 13, but it handed the whole thing back and sat at 2.4% on Monday – marking a nearly 14-point swing.
Four weeks. And you crossed the line 38 basis points behind the plain old S&P 500.
You took the ride, but you did not reap any rewards for the ride.
What the System Says About XLK
I ran the tech sector through Adam’s Green Zone Power Ratings system. Not the exchange-traded fund (ETF). The 73 companies inside it are each scored and then weighted according to how the fund actually holds them.
XLK Averages “Neutral” Rating
Here are the results…
- Quality: 89.4.
- Growth: 80.4.
- Momentum: 63.1.
Those are not good scores. They are elite scores. By the metrics that tell you whether a business is any good, Big Tech is the best roster in the league. And it’s not close.
Now, let’s examine the other side of the sheet…
- Value: 14.7.
- Size: 1.3.
The whole sector rates a 44 out of 100.
That is my fantasy team. Superstars at the top, nothing left in the wallet and a season that ends 3-10.
Here is the part that should stick with you. Look at the value line again.
Equal weight scores 24.2. Fund weight scores 14.7. The gap is -9.5, and that’s no accident. It is the price you pay for size.
The more money the index pours into the biggest names, the worse the price gets. You are not buying tech. You are buying tech at the top of the auction.
Three Ways To Prove It
Start with Nvidia Corp. (NVDA), which accounts for 14.21% of this fund on its own.
The company reports today after the close. Wall Street wants $2.09 per share on $92.2 billion in revenue.
That revenue figure would be up roughly 97% from a year ago. Nearly double.
And here is Wedbush analyst Matt Bryson on what the last three of those beats bought shareholders: the stock is “roughly unchanged from October of last year.”
Three straight beats. Ten months. Nothing.
Great company. Flat stock. That is the entire lesson in one ticker.
Moving on, let’s talk about what Intel’s (INTC) performance suggests right now.
Through Friday’s close, it was up 144% for the year, the best chip story on the board.
On Monday, it fell 5%, more than Advanced Micro Devices (AMD) and Taiwan Semiconductor Manufacturing (TSM).
When traders wanted out of chips ahead of Nvidia’s print, they sold the winner first.
Remember, crowded is not the same thing as safe.
Then the math nobody checks. Nvidia, Apple (AAPL) and Microsoft Corp. (MSFT) account for 36.43% of XLK. Three stocks. Thirty-six cents of every dollar.
Top Weighted Positions In XLK
I rated all eight of those top positions. I am veiling the scores today, but I will tell you their shape. Five of the eight do not clear the halfway mark.
Exactly one lands in the top third of my system. It is not the one you would guess, and it is not one of the big three.
What To Do About It
Do not buy the sector. Buy the price.
Three specific moves.
First, if you own XLK, stop calling it a technology allocation.
It is a three-stock bet with 70 more companies riding along. Write down your dollar exposure to Nvidia, Apple and Microsoft, add in whatever you own directly and cap that number at something you can live with.
Second, do not add to chips ahead of today’s print. Nvidia has beaten estimates four quarters running, and the average move on report day across its last five reports was down 2%.
Beating the number and paying you are two different events.
Third, make price a requirement, not a preference. In Adam’s system, a stock has to clear on value before quality and growth count for anything.
An 89 on Quality and a 15 on Value gets you a 44. That is the whole equation.
Own the businesses that pass both tests, size them yourself and set your exit before you enter.
Remember my lesson… the best roster does not win the league. The right prices do.
Until next time…
Safe trading,
Matt Clark, CMSA®
Chief Research Analyst, What My System Says Today
