Time to Get Bearish on the Tech Sector?

While stocks have enjoyed one of their strongest starts to a year in history, several major tech names have lagged behind. Looking at recent developments, it appears that investors should be turning cautious on the tech sector as earnings season begins.

Insider selling is one area of interest drawing attention to the technology sector. Insider selling at the biggest technology companies is hitting a record pace. Alan Newman, editor of Crosscurrents newsletter, tells CNBC that more than 55 million shares were sold over the past six months versus only 1,780 shares bought, bringing the ratio to an “eye-popping” 31,109 to 1. This includes well-known names such as Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL), and Qualcomm (NASDAQ:QCOM).

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“Insider activity confirms the rosy scenario indicated by prices is only an illusion,” wrote Newman. “Insiders have no confidence in their own companies. While prices appear to be indicating an all clear, we remain in one of the most egregiously speculative phases ever seen.”

There are many possible reasons for insider selling besides a lack of confidence, but other caution signs are flashing…

The earnings outlook is weak across the board, with more than 100 companies in the S&P 500 issuing negative warnings, the worst pace in 12 years considering the level of positive revisions. Wall Street expects the technology sector to grow revenue by 4.5 percent year-over-year, but earnings are estimated to decline nearly 4.0 percent. A strong U.S. dollar impacted technology names last year, and will likely do so again. Furthermore, the global economy is still sluggish.

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The latest report from research firm IDC showed that worldwide PC shipments totaled 76.3 million units in the first quarter of 2013, down 13.9 percent from the same quarter in 2012. It was worse than estimates calling for a 7.7 percent decline, and the sharpest contraction ever in a single quarter. The dismal response to Windows 8 is receiving much of the blame, but even Apple (NASDAQ:AAPL) posted a 7.5 percent decline in U.S. shipments. Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL) led the decline in worldwide and domestic markets.

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“Although the reduction in shipments was not a surprise, the magnitude of the contraction is both surprising and worrisome,” said David Daoud, IDC Research Director, Personal Computing. “The industry is going through a critical crossroads, and strategic choices will have to be made as to how to compete with the proliferation of alternative devices and remain relevant to the consumer. Vendors will have to revisit their organizational structures and go to market strategies, as well as their supply chain, distribution, and product portfolios in the face of shrinking demand and looming consolidation.”

Last week, shares of Microsoft suffered their biggest drop in more than a year after Goldman Sachs (NYSE:GS) downgraded shares from Neutral to Sell. The firm cited worsening PC trends and a “lack of traction in tablets and smartphones.” Analysts at Nomura Holdings and Hilliard Lyons also downgraded Microsoft from Buy to Neutral.

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Intel (NASDAQ:INTC), the world’s largest semiconductor, is also seeing a notable slowdown. According to analyst Jim McGregor, president of Tirias Research, Intel’s fabrication facilities are idle and sitting at their lowest rate of utilization in history. Fabs cost billions to build and run, and are vital assets for chip-makers.

He tells IT World, “This is the first time we’re seeing the entire industry coming up fairly well, but the PC sector is not leading it. The PC is not driving the direction of technology anymore, it’s not driving processor technology and it’s certainly not the software magnet for technology anymore. It’s a tablet and smartphone world.”

The most important tech stock to watch this earnings season…

Investors looking for a reading on earnings season with one single stock may want to pay closer attention to International Business Machines (NYSE:IBM). Bespoke Investment Group looked at every stock in the S&P 500 and how they correlated with earnings season. The computer giant had the highest correlation.

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When IBM beats earnings estimates, the S&P 500 trades higher 80 percent of the time over the next five weeks. However, when IBM misses estimates the S&P 500 trades lower 75 percent of the time, serving as a much better indicator than Alcoa.

Intel and Yahoo! (NASDAQ:YHOO) report their quarterly earnings on Tuesday. Meanwhile, Google (NASDAQ:GOOG), IBM and, Microsoft all announce financial results on Thursday.

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