Technology was the first sector to eclipse previous highs after the December meltdown in the U.S. stock market. Will technology lift the rest of the market to new highs, or will the market drag down technology?
Let’s take a look.
The S&P 500 Index
and its trading counterpart, SPDR S&P 500 ETF
is sub-divided into 11 sectors. Here they are, along with their weighting:
Information technology: Technology Select Sector SPDR ETF
Health care: Health Care Select Sector SPDR ETF
Financials: Financial Select Sector SPDR ETF
Consumer discretionary: Consumer Discretionary Select Sector SPDR ETF
Communication services: Communication Services Select Sector SPDR ETF
Industrials: Industrial Select Sector SPDR ETF
Consumer staples: Consumer Staples Select Sector SPDR ETF
Energy: Energy Select Sector SPDR ETF
Utilities: Utility Select Sector SPDR ETF
Real estate: Real Estate Select Sector SPDR ETF
Materials: Materials Select Sector SPDR ETF
As the chart below shows, since its inception in 1998, there’s never been such a quick V-shaped recovery from 52-week low to all-time high. It took only six months to erase a 20% drop.
The only instance that comes close is 2007. It took XLK 50 months to challenge the 2007 bull market highs, and another 13 months of rocky trading to surpass that high for good.
If we go back further, we find four other instances where the technology sector recovered a 20% loss in less than six months: 1982, 1986, 1996, 1998.
In 1982 and 1986, technology stocks continued higher almost unabated. In 1996 and 1998, tech stocks suffered losses of about 10% before resuming their rally.
However, all five instances had one thing in common: Twelve months later, technology stocks were higher every time, with an average gain of 35%.
History suggests continued long-term gains, with a 60% chance of short-term weakness.
The strong momentum behind the XLK rally confirms the bullish S&P 500 breadth thrust I discussed in January: “S&P 500 started 2019 with the same bullish signal as in 2009.”
What’s the risk of a short-term pullback?
Based on the resistance and support levels, below, I would quantify short-term risk as follows:
• Low if XLK can move and stay above 76.40. (A sustained move above 76.40 could lead to 78.50.)
• Medium if XLK fails to move above 76.40, and falls below 75.
Additional longer-term indicators for the S&P 500 are discussed here: Finding an edge in a dull stock market.
Simon Maierhofer is the founder of iSPYETF and publisher of the Profit Radar Report.