Almost Time for a Tech Breather?
Tech is unstoppable.
Just how unstoppable? Over the last 5 years, the Information Technology has risen more than 200%, 2x the return of the S&P 500 index. It goes even further than that, though. Tech’s dominance has been so extreme that every other sector has lagged the benchmark. 10 out of the 11 sectors are below ‘average’.
The run has helped the Tech sector completely erase the underperformance from the peak of the dotcom bubble. It took more than 20 years, but Tech is now setting new all-time highs compared to the rest of the market:
Don’t believe the narrative that it’s just a handful of stocks, either. The mega caps are certainly a big driver of the last few years of gains, but there’s strength below the surface, too. The equally weighted Tech sector is breaking out against the equally weighted S&P 500.
And the vast majority of Tech stocks remain in technical uptrends. Three-quarters of the sector’s constituents are above their 50-day moving average and even more are above their 200-day.
Of course, stocks don’t go up in straight lines - not in perpetuity. So how much further will Tech go?
We’re eying $215 for XLK, the SPDR Technology Sector ETF. That’s the 161.8% retracement from the 2022 bear market decline and a logical place to find some resistance.
One major market leader has already reached our target. Earlier this week, Nvidia topped out at the 261.8% retracement from the 2021-2022 decline.
Does that mean we want to be shorting NVDA up here? Not unless you enjoy standing in front of a roaring freight train. Does it even mean NVDA has to stop going up? Of course not. The stock couldn’t care less what targets we put on it. But this is a perfectly logical place to see some digestion, and we like stepping aside and watching to see how it responds to this potential area of resistance.
It’s not just Nvidia. Plenty of other Tech stocks are nearing our targets, too. That makes us cautious about initiating a bunch of new longs. Whether that caution turns into negativity will require more than just a stalling out, though. This is a bull market in stocks, and we aren’t going to be betting against the strongest sector in this bull.
Not until we see some outright weakness, like a growing list of new lows. As of right now, 95% of Tech stocks and 85% of stocks in the S&P 500 have set new 3-month highs more recently than a 3-month low.
Zooming out to a longer-term basis, more than 80% of Tech is in a cycle of new 52-week highs, the best mark of any sector. Slice it any which way you want, that’s not bearish.
So let’s take a closer look at how things are shaping up beneath the surface.