Tech Trading at All-Time Highs - 11/29/2023
New highs aren't bearish
There’s nothing bearish about all-time highs.
The goal of technical analysis is to identify trends in the markets that we can profit from. One hundred years ago, Charles Dow was laying the groundwork for modern trend identification with his columns in the Wall Street Journal - columns which comprised what came to be known as ‘Dow Theory’. Dow Theory isn’t just about getting confirmation from the transports. In fact, that’s not even the most important of Dow’s tenets. Much more meaningful are his thoughts about the three types of trends: primary, secondary, and minor.
Primary trends (e.g. bull and bear markets) last a year or more. Within those broader movements, secondary trends are smaller movements that last weeks to months. Minor trends can last for days to weeks.
Trying to identify the current direction of each the primary, secondary, and minor trend is a challenge, of course. If it wasn’t, you wouldn’t bother reading our work, and we wouldn’t bother writing it. Today, though, there’s no question about the trends in the Tech sector, where we’re on pace for the highest weekly close ever. New highs don’t happen in downtrends.
The Tech sector isn’t just setting new highs. It’s also setting breaking out versus the rest of the market.
It took more than 20 years to get back to the relative peak that was set during the dotcom bubble, and reaching those former highs sparked a Tech selloff in 2022 that turned into the worst bear market since the Financial Crisis. Now, we’ve absorbed all that overhead supply and Tech is a leader once again.
Here’s a closer look at the Tech/SPX ratio. The failed breakdown at year-end 2022 was the catalyst that put an end to the growth-led bear market in stocks.
There’s a popular narrative that the market this year is being driven by just a handful of mega caps. Don’t believe it. True, mega caps have been some of the best performers in 2023, and without them, the gains in the S&P 500 and the NASDAQ wouldn’t be as large. But Tech’s leadership is broader than just a handful of names. Check out the ratio of the equally weighted Tech sector vs. the equally weighted S&P 500: it’s breaking out to new highs.
And while not every stock in the SPX is on the rise, the majority of them are when you look in Tech, Communication Services, Industrials, and Energy - all traditionally risk-on sectors. In Tech, 63% of constituents are above a rising 200-day moving average - the best mark for any sector. Trends are weaker in traditional risk-off sectors like Utilities, Consumer Staples, and Real Estate.
One place Tech’s leadership doesn’t extend is the small caps. Small cap tech is in the ‘Lagging’ quadrant of the weekly Relative Rotation Graph. And it’s heading the wrong direction. The small caps in general haven’t given us much reason to be excited, but if you must get involved there, look outside of the tech sector.
So what’s the gameplan for Tech going forward? The large cap sector is clearly in an uptrend, so we don’t want to be making big bearish bets here. And we obviously want to avoid the small caps until they show signs of improvement.
But this probably isn’t the best time to be going all in from the long side either, either. December is historically one of the better months for the S&P 500 overall, but it’s the single worst month to own Tech. Since 1989, Tech has underperformed the SPX in 65% of Decembers and by an average of about 1%.
January is a much better time to own the sector. Tech has led 75% of the time and outgained the benchmark index by an average of 2.25%.