Will the Telecom Stocks Keep On Climbing?
When it comes to overbought telecom stocks, should traders remain on the line for much longer?
Closing higher for seven days in a row, the strength of the rally in the iShares Dow Jones US Telecommunications Sector Index Fund ETF (NYSE: IYZ) has put the ETF in technically overbought territory for more than a week. And with these overbought conditions developing while the fund is still trading below its 200-day moving average, the likelihood of near-term underperformance has grown significantly.
Over the past several weeks and months that IYZ has spent in bear market territory, multiple-day rallies have been opportunities to sell rather than to pile in on the long side. A four-day rally in August led to a sell-off during which IYZ fell more than 4% over the next three sessions. Five days in a row to the upside in mid-September triggered a steep selling frenzy that sent the ETF lower by more than five percent over the following five days.
Even less dramatic bounces into overbought territory in January have resulted in the same, short-term underperformance, if not significant downside.
As of Wednesday’s close, the iShares Dow Jones US Telecommunications Sector Index Fund ETF has earned “consider avoiding” ratings of 1 out of 10, our lowest level. The ETF has a negative, short-term edge of more than one and a quarter percent.
Some of the main component stocks contributing to the overbought conditions in IYZ are AT&T (NYSE: T), flat on Wednesday after closing higher for seven days in a row, as well as some of the fund’s lesser holdings like Crown Castle Intl Corp (NYSE: CCI), which began the week in overbought territory and was just at new, 52-week highs, and SBA Communications (NASDAQ: SBAC), which has also just begun to pull back from their highest levels in more than a year.
Also significantly overbought up until recently were shares of Sprint Nextel (NYSE: S), whose double-edged role as a iPhone vendor has resulted in big sales of Apple (NASDAQ: AAPL) iPhones and Sprint’s largest quarterly loss in years. The stock had finished in overbought territory on Monday, earning a “consider avoiding” rating of 3 out of 10, before reversing on Tuesday and following through lower by more than 1% on Wednesday.
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David Penn is Editor in Chief of TradingMarkets.com