There is no denying that Technology has been a leader over the past 18 months. It’s amazing how much this historic breakout in Tech was completely ignored in 2016 since U.S. elections are much sexier and help news people sell ads. “Forget the relative breakout in Tech, how does what Trump or Hillary said on the twitter today impact your portfolio?” You see the difference? We’re not here to entertain or sell ads to sponsors. We’re here to try and make money in the market.
In September of 2016 I was pounding the table about this monster 15-year base in Technology relative to the S&P500. There was no question that the path of least resistance was higher. As they say, the bigger the base, the higher in space. I encourage you to check out exactly what we were seeing at the time. Technology is up close to 50% since then while the S&P500 is up just about half that, 25%. So now the question is whether or not Technology, which has the largest weighting in the S&P500, is due for a breather, or does it still have room to run?
It has taken almost 18 years to get back to that epic peak in March of 2000. When people talk about how the market has gone, “too far too fast”, they conveniently leave out the fact that the Technology Sector, representing a quarter of the entire S&P500, has gone absolutely nowhere in almost 2 decades!
Here is the Technology Sector Index Fund $XLK trying to hold above that historic top near 64. As far as I’m concerned, this is the line in the sand. If we’re above that level, then the path of least resistance is much higher, in my opinion: 50% higher towards 96:
If we’re not above those 2000 highs, it would be evidence to me that no, the demand has not been able to absorb all of that overhead supply from 18 years ago. In that case, there are two kinds of risk: 1) Opportunity cost, what else can we do with that money? and 2) Downside risk, losing money. In either of those scenarios we do not want to be long. This is an above 64 or nothing mentality.
It should not be a surprise that Semiconductors look very similar to Technology. Here is the PHLX Semiconductor Index $SOX flirting with those same 2000 highs. The approach here is the same as Tech: we only want to be long Semi’s if we’re above 1332:
Like Tech, I think there could be another 50% upside, but that thesis is only valid if we’re above 1332. Otherwise, that same dual risk can be found here as well.
Considering how important Semi’s are to Tech, and how important Tech is to the overall U.S. Stock market, and how important the U.S. Stock market is to stocks globally as an asset class, I think it’s crucial that we recognize the significance of these levels.
I laid out a list of Technology names that we want to be involved with from the long side. Members can access those here: Trade Ideas.
If you’re not already a member, you can use this risk Free trial to get a list of Tech stocks with favorable risk vs reward propositions.