Trading Strategy For Playing The Tech Rally And Weakness In Financials

moneyrollsUS markets opened with a thud Wednesday as the news of better than expected existing home sales was tempered by the impending announcement by the Federal Open Market Committee as to the future of additional monetary easing.

In a strategy referred to as “Operation Twist”, the central bank is expected to announce that it will sell short-term assets, and use the income to purchase long-term assets, as well as keep interest rates near zero.

Investors are concerned as to the effectiveness of yet another round of quantitative easing, and the potential for inflation due to artificially low interest rates.  While the effect of cheap money on the US economy has been largely ineffective, there seems to be nowhere else for it to go but the stock market.

Both the Dow Jones Industrial Average, and the S&P500 were trading lower as of mid day, while the NASDAQ traded slightly to the upside, carried by technology.  The question facing many investors is how to effectively implement this tech rally into their trading strategy, and hedge against market uncertainty.

Trading Strategy For Investing In The Tech Sector

The tech sector was carrying the market on its back as of mid-afternoon Wednesday, with Intel (INTC), IBM (IBM), and United Technologies (UTX) topping the Dow Jones Industrial Average.  Oracle (ORCL) shares were also advancing 7% in mid-day trading after first quarter results beat analyst’s estimates.

While it is not usually a profitable trading strategy to chase performance, the tech sector is home to one of the most cash-rich corporations, and investor darling, Apple (AAPL).  With an earnings multiple that is over 50% lower than the average tech sector stock, and at any given time more cash in its coffers than the US Treasury, Apple seems to be unstoppable.

As Apple currently boasts an enviable balance sheet, it appears to be a good deal regardless of how it handles its cash positions.  As the market’s reaction to Operation Twist may be unkind given the results of QE2, look for buying opportunities in Apple as well as Amazon during what will surely be a volatile period in the market as Europe, and specifically Greece, tackle debt issues and a risk of possible default.

Trading Strategy To Profit From Weakness In Banks

Even with the temporary boost banks received last week from the central banks announcement that it would be shoring up the base of a select group of troubled European banks, financials continue to underperform, with a possible Greek default putting significant pressure on banks.

To potentially profit from this weakness in your trading strategy,  you may want to explore opportunities to short banks, or consider playing an inverse ETF such as Direxion 3x Financial Bear ETF (FAZ).  This inverse ETF seeks daily investment results of 300% of the opposite – or inverse – of the price performance of the financial index, creating a potential to realize profits from the current financial weakness in the market.

Use caution when investing in this type of ETF, and always use these types of financial instruments in conjunction with other types of risk-mitigating strategies, and within the confines of your unique trading strategy.

Buy For Yield

As I am always a proponent of purchasing stocks and ETFs based on a long-term trading strategy and strong fundamentals, I also recommend looking for buying opportunities in dividend paying companies.

With more and more companies paying and increasing dividends, it is a worthwhile trading strategy to be paid to wait.

Look for dividend paying stocks in the tech sector such as Activision (ATVI), to take advantage of dividend yield, as well as the current rally in the tech sector as a whole.  With uncertainty seemingly omnipresent on the horizon, a comfortable income from dividend payments could soften the blow from potential volatility in the market.