Late last week I was invited to come on FOX Business to talk about why I like Energy. The conversation temporarily shifted towards why I hate Technology, and my answer was simple. We are seeing the exact opposite action in both of these sectors. I like Energy because we’re seeing relative strength break out as prices hit new all-time highs. In Tech, we’re seeing relative strength break down as prices roll over.
Here’s what I mean. This is a weekly chart of Technology $XLK relative to the S&P500 $SPY. Look at all that support from 2009-2011 while momentum avoided hitting any oversold readings and remained in bull mode. Once $AAPL started crash (see here), it helped drag down the relative strength in this sector while momentum also hit oversold readings. This is a very bearish characteristic:
In the second half of last year, relative strength started to move higher but momentum failed to hit any overbought conditions rolling over in the 60s. This is text book bearish behavior. Meanwhile, prices of XLK/SPY are rolling over right around that former resistance from years ago. Our polarity principles tell us this is very normal as former demand has now turned into overhead supply.
For me to get back on the bullish train for Big Tech, we’re going to need to see that shaded area taken out. We really want to see the January highs in XLK/SPY taken out to the upside. I believe this is the lower probability scenario and would expect Technology to continue to underperform going forward.
This is not an area where I want to be as it tends to be a much more early cycle sector. I would prefer to be in late cycle sectors like Energy. If the data changes, I will certainly keep an open mind and adjust accordingly. But we have to react to what is currently in front of us, and it’s just not tech. I’d stay away or stay short.
Tags: $XLK $XLE $AAPL $GOOG $MSFT $VZ