What If Amazon Was A Technology Stock?

JC Parets
September 28, 2016

One of the things that impresses me the most about Technology is the fact that Amazon, a stock up over 70% since February, isn't even a tech stock. While some people like to argue that Amazon is a Technology company, and that may be true, it is not a Technology stock. In fact, $AMZN represents a 0% weighting in the S&P Technology Sector Index or in the ETF. Instead, it spends its days holding up the serial underperforming Consumer Discretionary Sector with a 13% weighting.

We trade and invest in stocks, not companies. So we'll focus on the supply and demand dynamics of stocks, and ignore the noise surrounding "companies". The big question I want to ask is, what would the Tech sector look like if Amazon was included?

First, let's open up the hood in the Technology sector. The top 10 holdings of the Technology Select Sector Index represent 60% of the entire index, which is approximately $3 Trillion in market capitalization. Here is the breakdown of the traditional Technology Sector:

xlk traditional weightings top 1-

The historic outperformance from the Tech Sector recently as it breaks out to 14-year highs to be extremely impressive. But what if Amazon was also part of that group?

Here is what the top 10 holdings of the Technology Sector would be if Amazon was included in this cap-weighted sector index:

xlk top 10 holdings with amazon

This is what the chart looks like based on a re-weighted technology index that includes Amazon in its calculation:

Click Charts To Zoom In

TECHwAMZN

It looks to me like there is more upside coming towards 280 based on the 161.8% extension of the consolidation since last year. After that, it can go to 300, which is the measured move of the amplitude of that consolidation.

The next chart is the Amazon-included Tech Sector Index compared to the Amazonless Tech Sector Index:

TECHWAMZN vs xlk

Although the scales aren't equal, the point here is to show that Tech including Amazon broke out last summer while Tech without Amazon didn't breakout until July of this year. If you're one of those people that thinks $AMZN should be considered a Tech stock, then you can see up here how the relative strength in Technology actually got going last year and is really nothing new.

Finally, here is the Amazon-included Tech Sector Index vs the traditional Tech Sector Index Fund (TECHwAMZN vs XLK):

TECHWAMZN-XLK ratio

To me this looks like Tech with Amazon is breaking out above a 10-month consolidation within the context of a longer-term uptrend.With momentum in a bullish range and prices above an upward sloping 200 day moving average, we need to be buyers of this chart for a move to new all-time highs.

So what why this all does matter? Who cares? Well, I think this analysis helps in a number of ways. First of all, as is obvious, you can just own this basket of stocks (or short them if this was in reverse). Second, you can use this to really see where the relative strength lies and where things are weak. For example Tech is on fire, has been for months. But during that time and even before that, Consumer Discretionary (including Amazon up 70% in 7 months) has been struggling relative to the S&P500. We're making new lows on a relative basis there even with $AMZN on fire. So it's the next largest components dragging it down. Sure enough, there goes Nike this week getting clobbered and continuing its downtrend that can also be seen throughout the internals of the sector itself.

This sort of top/down approach is what I do every day. Understanding the construction of the data that you're analyzing, I believe, is just as important as the analysis itself. This process allows me to start at the top, with the major U.S. and Global Index, and then break things down to the individual sector, sub-sector level and ultimately down to the stocks and ETFs for execution. To learn more about that approach, you can find more information here.

So this is what it would be like if Amazon was a Tech stock. Many argue that Amazon is a Tech stock. But it is not. Far from it, in fact, as it represents 0% of the Technology Sector and 13% of the Consumer Discretionary Sector (it's biggest holding).

I hope this adds some value to your process and answers some questions as to what the market would look like if Amazon was a Tech stock. I think it helps reiterate the strength we've seen in Tech as a sector lately.

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