This Sector Could Reward Traders With Double-Digit Gains

A deal on the fiscal cliff — at least the tax part — caused the “risk on” trade to go into hyper-drive on Jan. 2. The first trading session of the year saw nearly every major average, and most sectors, soar between 2% and 3% on average. This relief rally over the certainty on tax policy wasn’t lost on the technology sector, as the Technology Select Sector SPDR (NYSE: XLK) surged 3.33% in the first session of 2013.

For the technology ETF, the gains are a welcome respite from the mostly downbeat trade that’s taken place since September. In fact, from the most recent high in September through the end of 2012, XLK was hit with a loss of nearly 9%.

Thanks to an early 2012 run higher in the shares, technology seemed like it would be the place to be for most of the year. Then we started to see the sector falter.

So, why was the September selling in the tech ETF so sharp? The one big answer is Apple (Nasdaq: AAPL).

Shares of the personal technology giant really hit the skids in September, falling from an all-time high of just north of $700 to just over $500 in December. The 52-week chart here of Apple clearly shows the September wane. In fact, the plight of the cultish bellwether nearly mimics that of XLK, with a big run higher to start out 2012, followed by a final quarter falloff.

Like XLK, Apple also saw a big buying spike in Wednesday trade, as money came back into the stock in search of its former glory.#-ad_banner-#

Now, it should come as no surprise that Apple has a major effect on XLK. The stock makes up nearly 20% of this ETF’s holdings, and is by far the single-largest holding in the fund. So, in a way, as Apple goes, so goes XLK.

However, what I like about XLK is that it holds 77 other technology stocks, many of which have seen a big surge over the past several years. Top holdings in XLK include Microsoft (Nasdaq: MSFT), IBM (NYSE: IBM), AT&T (NYSE: T) and Google (Nasdaq: GOOG), which, in order, round out the top five positions in the fund.

If you own XLK, and if Apple is on, you are likely also going to have a lot of satellite techs respond well with money flowing into the sector. The downside, of course, is that when Apple sells off, it’s hard for XLK to maintain a bullish disposition.

The bottom line here for traders is that both XLK and Apple have, in my view, experienced a bit too much selling in Q4. That makes them good candidates for a new wave of risk-on buying in each — and that is a trend traders can exploit over the next six weeks.

Action to Take –> Buy XLK at the market. Set stop-loss at $27.44. Set initial price target at $32.81 for a potential 11% gain in six weeks.

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This Sector Could Reward Traders With Double-Digit Gains in 6 Weeks