2019 was quite the year for Large-Cap Technology. Our benchmark, the SPDR Technology Sector ETF, $XLK gained 50% during the year, nearly doubling the performance of the next best sector, Financials ($XLF), as well as the S&P 500 itself, both of which returned about 30%. Many of the analyst notes and financial headlines I see thus far in 2020 are predicting catch-up trades in beaten-down sectors such as Energy and areas of Materials. While this does jive with a long-term bottom we’re observing in Commodities markets; we believe the evidence is simply not there yet as far as equities are concerned. Rather than get cute, we’d suggest sticking with what’s been working over the past several years… Technology.
Tech is not only coming off a great year, but it’s also showing no signs of slowing down as the sector has kicked off 2020 very strong. It’s consistently lead the market over just about every timeframe; 1-month, 3-month, 6-month, and Year-to-Date, it remains the clear winner among the 11 S&P sectors. Communications ($XLC) has been a close 2nd over the near-term, which makes sense as the Index recently inherited many of the traditional Tech behemoths, including the likes of Google ($GOOGL) and Facebook ($FB).
Not only is Technology continuing to lead, but we’re observing a very bullish expansion in breadth within the space as some of its most important subsectors like Cloud Computing ($SKYY), Cybersecurity ($HACK) and Software ($IGV) continue to grind to fresh all-time highs, joining the all-important Semiconductor Industry ($SOXX) which has consistently been printing record highs since April of last year. Here is a current look at the three subgroups.
After consolidating sideways since Q2, all three of these ETFs recently resolved higher. The key takeaway here is that Technology is not just leading from a relative strength perspective, but momentum and participation are also improving beneath the surface. Small-Cap ($PSCT), Mid-Cap, and Equal-Weight Tech ($RYT) are at all-time highs as well. Add to the fact that our custom, equal-weight FAANG, and MAGA Indices also recently broke to new all-time highs, and it certainly appears as though everything is working for this space right now.
As we continue to assess new data as it comes in, the picture becomes clearer and clearer… the recent rally in tech could very well be in its early innings. If you look at a long-term chart of $XLK you’ll notice that it just broke out above its 2000 dot-com bubble high in early 2018 and then successfully retested that breakout around this time last year. After going nowhere for nearly two decades, this looks a lot like the beginning of a new structural breakout for Tech stocks.
So while the mainstream media focuses on stretched valuations and insanely large market caps in names like $AAPL & $MSFT, we continue to focus on price behavior, and that data remains incredibly constructive as healthy rotation and broadening participation is taking place within the sector. An esteemed Technician and colleague of mine recently said, “It’s not about looking for new trends; it’s about looking for trends that are already in place.” When it comes to Tech and how we want to position our portfolios for the new year, I think these words sum it up as well as any. Don’t overcomplicate things, just stick with what’s working.
I hope you enjoyed this post! As always, reach out to me at Strazza@thechartreport.com with any questions or comments.