From the desk of Tom Bruni
Since the market’s volatility picked up in late January, one key piece of the bear thesis has been weakness in Technology, yet we’ve not seen a crack and flush lower. I don’t know about you, but I was promised a “Tech Wreck” and will not leave until we get one or Mr. Market provides me a refund.
Okay I’m being facetious, but in this post I want to outline what I’m watching and explore what the implications are if the potential bearish patterns in this sector don’t pan out.
First let’s take a look at a weekly chart of the XLK. Despite two peak-to-trough declines of ~12% since late January, the sector continues to trade above its 2000 weekly closing highs of $64. Although not shown here, prices are still above a rising 200-day moving average and momentum remains in a bullish range, not hitting oversold conditions on either of these pullbacks. I understand the bearish implications that a break below $64 would have, but we’re not there yet. Until we are, the weight of the evidence suggests being long the sector or flat if you’re so inclined, but not short.
Within the sector, the “canary in the coal mine” that’s being pointed at is the Semiconductor index which has experienced several double digit declines since late last year, with the largest being roughly 16%. Despite all the volatility and weakness, prices are still above a rising 200-day moving average and momentum is in a bullish range. If the sector was really as weak as many think, we’d be seeing momentum hitting oversold territory and staying there, but we’re not. Until prices break the neckline at 1,210 I don’t want to hear anything about the potential head and shoulders pattern in this index either. If you think the market’s going to make it that easy for us, you’ve got another thing coming. Ultimately I think the weight of the evidence suggests we break above the 2000 weekly closing highs at 1,330 and invalidate this pattern, but until then we’re all just guessing.
Another component of the sector exhibiting some weakness after a strong run is the Social Media index. Prices met our target near 35.50 and closed back below it and its trendline from the 2016 lows in late March, confirming both a failed breakout and the bearish momentum divergence that built up over time. Still, prices haven’t flushed lower as many expected and remain above a rising 200-day moving average with momentum in a bullish range. This to me suggests a neutral stance is most appropriate until we get back above 35.50. Until then the ball is in the bears court to take control and break the recent lows.
The next component is the Dow Jones Internet Index, which has been by far one of the strongest. It’s experienced two double-digit declines of 10% and 13%, but held the breakout area at 113, held its uptrend line from the June 2016 lows, and momentum maintained its bullish range, not even coming close to oversold territory. Prices are now only 4% off all-time highs and look poised to head higher from here, which is another feather in the hat of the bulls.
Last up is the Cyber Security index which did nothing for 2.5 years and finally broke out in early March. Prices made new all-time highs, retested the breakout area during an 8% pullback, and are now just a stones throw away from all-time highs. Prices are above a rising 200-day moving average and momentum remains in a bullish range (it hasn’t event been oversold since early 2016!). I don’t think we’d see this index hitting new all-time highs if technology stocks and the market were crashing.
My last point on the subject is that there have been many leading stocks which appeared to be topping, either in a rounding top like $BABA below or some other form, but recently invalidated the pattern and moved higher. Apple, Amazon, Google, NVIDIA, Intel, Cisco, etc. the list goes on. $BABA looks to be completing something similar and my key takeaway from this is that all of these stocks were above rising 200-day moving averages and had momentum in a bullish range. These are extremely strong uptrends and they’re not going to stop on a dime, tops are processes. Until we start to see the 200-day moving averages start to flatten out / begin downward sloping and momentum hitting oversold conditions on some of these indexes or leading stocks, a bullish stance remains appropriate, no matter how irresponsible market bears think that may be.
The Bottom Line: Despite the double digit drawdowns in the Technology sector and its components, most remain in strong uptrends with momentum in a bullish range. Many stock market bears have been pointing to Technology as evidence that the market will resolve its recent range lower, but sector rotation continues to support the indices. If Technology starts to lead again as the evidence above suggests, the higher probability outcome is that the major indices resolve their recent ranges to the upside and head to new highs. We have our risk management levels in case we’re wrong, but until the data changes we want to be buying equities and leaders like Technology.
I’ve also done a more comprehensive piece on market breadth (Premium) both in the US and globally, so check that out if you’d like more information on why I hold this view.