Hey There Income Hunters,
Who would have thought that five months into 2021 tech would be at the bottom of the sector rankings?
The answer is anyone (like me!) who understands that interest rates are the base value that all other assets are measured against.
I’ll explain …
First, you should know that government bonds offer risk-free returns. How is that possible? Because the government issues both the bonds and the currency that backs them.
Held to maturity, the only risk for bonds is inflation. That’s why the U.S. 10-year rate adjusted for inflation is the most important interest rate in the world. When it’s positive, bond holders are earning a long-term, risk-free return …
However, when the rate is negative, investors will search for a comparable, highly valued stock that can offer solid long-term returns. Those include, large-cap growth stocks that build in great returns out into the future …
And that reduces the variable down to where interest rates will be in the future.
Stay with me on this because I will show you where tech is going for the rest of this year and which stocks are the most overvalued and undervalued.
10-year Rates Make the Difference
It’s all changing for tech in 2021. Valuations reached nosebleed levels and then 10-year rates started climbing and went positive in Q2.
It has been like clockwork this year. Rates go down, tech goes up and vice versa…
And aside from the Fed forcing rates to stay down, consensus is for a turn in the long-term downtrend in rates to reverse — which would create a major headwind for tech stocks that remain overvalued.
The Most Overvalued Technology Stock
Seagate Technology PLC (Ticker: STX)
STX continues to be a leader in the hard disk drive storage industry. However hard disk is being replaced by solid state drive and recently the latter costs have closed the gap on the former. In turn, STX has lost all barrier-to-entry advantages and is now a dying business.
The Power Income fair valuation for STX is $42 — meaning the stock is trading at 100% premium …
And check out the technical set up:
Three of the four highest volume weeks in 2021 have been down weeks…
Overvalued & Undervalued Candidates
Now let’s take a look at the technical setup for Technology Select Sector SPDR Fund (Ticker: XLK). It’s actually the first major sector that has rolled over and gone into a bearish trend …
It’s hard for investors to easily change from buying all dips in a sector to selling rallies …
However, that is the condition tech is in now. This market has become more of a long/short strategy than just buy-and-hold.
Bring It Home
You can extend today’s thought deeper into other large-cap growth companies including Netflix (Ticker: NFLX), overvalued by 98%, Tesla (Ticker: TSLA), overvalued by 78%, and Amazon (Ticker: AMZN), undervalued by 25%.
The big wildcard in the market will continue to be the Fed and if/when they move to yield curve controls and holding interest rates down.
That changes everything — including getting tech hot again.
I’m monitoring the situation closely, but I don’t think we’re close right now. I’ll be avoiding tech for now unless I’m employing a bearish strategy.
Live and Trade With Passion My Friends,