This commentary originally appeared on Dec. 28, on Real Money Pro -- the ultimate traders' resource for actionable trade ideas and in-depth market analysis. Click here to learn more.
Look for a mixed bag in the 2012 tech universe, with a narrow selection of surprising winners and a bigger group of chronic losers, held down by a continued drag in international sales and a U.S. consumer who is still looking for bargains, even though local economic conditions are improving as we head toward the U.S. presidential elections.
Adding to the challenge, this year's top tech stocks are unlikely to repeat their superior performance next year, and just skimming the current cream of the crop should turn out to be a losing strategy. Allocation will toss a final roadblock in front of tech investors, because it won't be a great year to be overweight this popular market group.
Reviewing my long-term charts, I've compiled a list of tech stocks and subsectors that I believe will outperform in 2012, as well as a number of widely held issues to avoid at all costs. Before identifying these picks, let's talk for a moment about Apple (AAPL), the tech elephant in the room. Specifically, how will this iconic company perform next year, compared with 2011?
As a longtime Apple shareholder, I believe the death of Steve Jobs has forced current management into a "show me" period, and the company is unlikely to get a free ride, unless it unveils an exciting new product or unless the growth curve for the iPad and iPhone accelerates. Realistically, Apple is unlikely to meet these objectives, exposing the stock to a mean-reversion swing that drops it down to long-term support between $250 and $300.
1. Cloud computing stocks: Winning and losing years tend to alternate for big growth stocks, and that's good news for the cloud computing group. After a rally that began after the bear market ended in 2009, this group has suffered through a terrible 2011. A return to glory in 2012 should benefit the cloud's biggest names, including F5 Networks (FFIV), VMWare (VMW) and Salesforce.com (CRM).
F5 Networks rose 600% between the 2009 low near $18.50 and January 2011 peak near $150. It then collapsed in three selling waves, pounding out a solid bottom at the 200-week EMA near $70. The subsequent bounce is rounding out a basing pattern that should yield a trip back to the all-time high in 2012. The next buy signal will come when it breaks above resistance near $120.
2. Semiconductors: Intel (INTC) and its numerous suppliers have suffered a recent setback, triggered by supply-chain disruptions from the Thailand floods. Despite these short-term headwinds, it's finally time for this stock and the broad sector to push into a market leadership role and stay there for a few years as consumer and business high-tech hardware takes on a more typical growth curve.
After the tech bubble burst in 2000, Intel plunged from the mid-$70s, hitting bottom in 2002. It then ground out a multiyear string of lower highs that finally broke to the upside in September of this year. This bullish action should support an uptrend that eventually challenges long-term resistance between the upper $20s and low $30s. That should contain the 2012 price action.
3. Enterprise Software: The enterprise software group has led the tech sector for years, and I expect this trend to continue, despite the natural rotation from strong into weak performing groups that often typifies first-quarter trading activity. However, I'm not that interested in International Business Machines (IBM) next year, because it had an outstanding 2011 and needs a long rest to absorb annual price gains.
Instead, Alliance Data Systems (ADS) is my enterprise pick for 2012. It returned to the 2007 high at $81 in early 2010 and pulled back, completing the final leg of a multiyear cup-and-handle pattern. It broke out in March of this year and has spent the last six months ticking higher within a rising wedge pattern that's working through round-number resistance at $100. Once the base at this psychological level is completed, the stock could take off toward $130.
1. Personal Computers: Forget Dell Computer (DELL) and Hewlett-Packard (HPQ) in 2012, because nothing on the tech horizon is going to stop their slow deterioration into mediocrity. For starters, PCs are toasters with exceptionally low profit margins, unless you're selling Macs. In addition, Hewlett is slowly losing its historic grip on printers and ink, which were staples in its profit production over the last decade.
Since the stock topped out at a nine-year high near $55 in April of this year, it has been declining in a horrific downtrend. It broke the 2009 low in August and has run in place since that time, trying to fill the high-volume gap. Once that task is accomplished, look for aggressive short-sellers to return in force and knock price down into the mid-teens.
2. Networks: Hardware and cables connecting the Internet and intranets will continue to be losing propositions in 2012, but I wouldn't bet against sector leader Cisco Systems (CSCO), because after a steady distribution phase, it's oversold and could trade considerably higher in 2012. Unfortunately, the rest of the group looks like death warmed over and is setting up for far lower prices.
It's been feast or famine for Juniper Networks (JNPR) since it bottomed out at an all-time low near $4 in 2002. After the stock hit a nine-year high at $45, three rallies since that time have run into three buzzsaws of selling pressure, with the latest reversal kicking into gear in February of this year,. Look for this downward spiral to continue next year until the stock reaches deep support near $12.50.