Social Media Sector Getting Clobbered – Is This Bad News for S&P 500?

Aside from a 28% ‘glitch’ earlier this year, the social media sector has been on a tear since May. However, this week saw a high volume sell off below various levels of technical support. Will this affect the S&P 500?

Social media stocks have been taking it on the chin this week: Facebook – down, LinkedIn – down, Twitter – down.

The Global X Social Media Index ETF (NYSEArca: SOCL) reflects this sad performance.

The Social Media ETF chart shows SOCL slicing below it’s 200 and 20-day SMA and the green support line.

Perhaps more importantly, Tuesday’s decline came on almost 5x average trading volume.

With a 20% rally from May to July, social media has been a leading S&P 500 sub-sector.

What does this social media sell off mean for the S&P 500?

The chart below plots SOCL against the S&P 500 and highlights periods of SOCL weakness.

A 28% March/April SOCL drop didn’t affect the S&P 500, in fact the S&P recorded modest gains.

Summary

A leading sector losing steam is not the best scenario, but recent history shows that SOCL weakness in itself doesn’t have to take down the S&P 500 (NYSEArca: SPY).

There are other factors that may take down the S&P and market in general, but we don’t even have to worry about those, as long as the S&P stays above a very specific support level. More details here:

S&P 500 Short-Term Forecast – Key Support Level

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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Bi-Polar Technology Sector is Torn By Performance of Groupon, Facebook and Apple

About 18 months ago stocks were fueled by the Facebook, Groupon, and the smart phone app frenzy (i.e. Angry Birds). None of the above companies are actually included in the Technology Select Sector SPDR ETF, but the prospect of a new tech boom was enough to lift the entire sector.

And while the technology sector has continued to move higher, it has left Facebook, Groupon and others in the dust. Why? Allow me to republish some research notes previously reserved for subscribers.

Facebook Warning: Published May 11, 2012

“Facebook (FB) is expected to go public on Friday, May 19. The media will gladly spread the frenzy, but I’d like to point out a few nuggets to put Facebook’s insane valuation into perspective:

– Assuming a valuation of $100B, FB will trade at 33x advertising revenues. Google trades at 5.5x.

– At $100B, FB will be worth more than: Caterpillar, American Express, Home Depot, Walt Disney and even McDonalds. In fact, 15 components of the mighty Dow Jones Industrial Average have a market cap of less than $100B.

– The market value of Google at its IPO was “only” $27B

– Apple currently trades around 3.8x sales. The same metric applied to FB would put its valuation at $15B.

To some degree the social media bubble is reminiscent to the 1999 tech boom. Most social media companies are valued based on promises more than established accounting standards. Recent IPO’s of Groupon, Pandora, Yelp, and Zynga created a lot of hope during the first couple of days of the IPO and fizzled thereafter.

Will FB await the same fate? You can’t predict the extent of any frenzy, but the amount of fizzled frenzies dwarfs that of sustainable ones. My bold prediction is that FB will loose at least 30% of its IPO price by sometime in 2013.”

Well, it turns out I was wrong. Since its May 2012 IPO ,Facebook shares have fallen as much as 61% (from a high of $45 to a low of $17.55). Facebook’s market cap is now $44 billion.

Groupon Warning: Published December 17, 2010

It was my belief that the Groupon movement (group coupons) is dangerous for the economy and unsustainable. This was contrary the most of Wall Street‘s outlook. I picked on James Altucher, a popular tech cheerleader, to contrast our difference of opinions.

“Altucher doesn’t believe there’s a new social media/coupon bubble. This time is different because Groupon’s rejection of Google’s $6 billion bid is ‘the dawn of a new and improved internet bubble. Unlike the bubble of the late 90s, though, this one is based on fundamentals, not irrational exuberance’.

It’s ironic that Groupon’s success and refusal of Google’s advance is seen as the dawn of a new era. Groupon has a killer business model, which is a goldmine for Groupon, but poison for healthy economic growth.

This new way of buying nurtures frugality and robs restaurants and other retail stores of their pricing power. Groupon is feasting on a deflationary trend while wizards like Altucher see the company as a gateway to the new and improved economy.

According to Altucher this is ‘not a bubble, it’s a real significant boom.’ It’s a boom all right, we’ll just have to see whether it’s an economic or deflationary boom. My money is on the later.”

Since its November 2011 IPO Groupon shares have fallen from a high of $31.14 to a low of $4. Groupon’s current market cap is $3 billion, half of what Google was willing to pay for the company.

Technology Sector at 11+ Year High. Why?

The Facebook, Groupon, smart phone app boom is deflated, so why has the tech sector moved on to an 11+ year high?

A look at the top holdings of the Technology Select Sector SPDR ETF (XLK) may hold the answer.

Apple, IBM, and Google account for 34% of XLK and trade at or near all-time highs.

Microsoft, AT&T, and Verizon account for 19% of XLK and, like the Nasdaq-100, trade at or near a 10-year high.

Former highflyers like Cisco, EMC, Hewlett Packard, Corning, Yahoo, Broadcom, Dell, Applied Materials, Sandisk, Juniper Networks and others continue to trade near the lower end of their 15-year range.

It appears that a few strong companies mask the performance of many weak companies. That’s not the definition of a strong market or sector.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.