It's Time for "Tech Winter"

12/09/2009 12:30 pm EST

Focus: STOCKS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

James Lowell, editor-in-chief of Fidelity Investor, says technology stocks tend to outperform the market in the winter months.

Years ago, it was easy to point to the months between October and February as historically heralding outperformance for technology stocks; then, the period truncated by two months, making November through January your best tech bet.

Over almost two decades, [using Fidelity’s Select Technology funds], technology’s seasonal outperformance pattern is compelling.

Several factors continue to make tech’s prospects look promising [now]. For one thing, technology names are a lot cheaper than they’ve been since the last bubble burst (although that could be said about most sectors of the market).

[Also], the fourth quarter is typically when corporate spending on new technology picks up. Corporate managers tend to hold some money in reserve. That unspent money has to be used in the fourth quarter or, when budget time comes around in the next year, there’s a high likelihood that efficiency experts may cut that budget.

This sales surge means tech company profits will likely be going up and tech stocks [should] rise on the expectation of higher, accelerating earnings. Another factor that ought to be at work is resurgent emerging markets.

Finally, as with many industries, hardware companies often end their production runs and begin retooling for new products after September. This means that any inventory left on the shelf suddenly becomes much cheaper as companies drop prices to clear it out. Many corporate purchasers who don’t need the latest and greatest wait for the final months of the year to buy this late-model equipment.

The techno-surge finally ends as technology companies rebuild inventories and a new purchasing cycle begins. In the early spring, [when] technology stocks don’t fall into any particularly profitable pattern that we can rely on.

What about the short-term pattern? Well, that tells a different story. The average three-month performance for eight pure-play tech sector ETFs over the past five years is -3.5% vs. -1.6% for the Standard & Poor’s 500. This does illustrate that the “tech winter” theory (as any market theory) is harder to predict in the short term.

But, most importantly, it illustrates that one bad year can easily erase your previous earnings, just as one great year, such as 1999-2000, can greatly exaggerate the trend: If you took out [the] 1999-2000 tech segment, even the long-term trend weakens considerably—a 7.3% average gain vs. 4.2% for the S&P 500.

Over the long run, buying tech in November and selling at the end of January proves to be a beneficial, if inconsistent, strategy (losing in only seven out of the 19 years). If you do decide to take a small tech stake, be sure to unplug it come February 1st if a rally does manifest itself and take the gains to the bank in order to review better opportunities.

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