Perspective and history have lowered expectations for tech stocks | Exchange places with Tom Bowley

No one loves a good bull market more than me. History tells us that most of us want to stay on the bull’s side. Perma-bears have a terrible long-term track record. They have called 30 of the last three long bear markets. Frankly, people who can’t see anything but a downward trend should find a new job or hobby. Below is a long-term chart of the S&P 500.

GDP + Inflation + Innovation = 9% average annual increase in the S&P 500. Ask yourself: How many times have you wished you could get out of the stock market, leave your investments alone, and just leave them alone? Be honest.

Seriously, how often does a persistent bear get it right? Hello, if you are a short term trader, being bearish from time to time is not a problem. The stock market sometimes moves too far and of course needs to be corrected. And after years of prolonged bull markets, there comes a time when stocks need more than just a correction and a prolonged bear market is justified. I think that’s not the case now. Talk again in 2030. With a bull market currently raging that has lasted 11 years, we won’t be in that for long. However, even during long-term bull markets, bulls should recognize when short-term risks increase and consider portfolio adjustments.

I think now is a good time to lean into the impact and perspective we may have in 2024.

We all know (or should know) that three aggressive sectors tend to drive most long-term bull market developments: Technology (XLK), Consumer Discretionary (XLY), and Communication Services (XLC). But they don’t lead everyone. And right now, there’s an example of our leaders leading the way for too long.

The S&P 500 rose more than 16% in 41 trading days from October 27 to December 28. We can use the 41-day percent change (ROC) to see how often the 16% level is reached or exceeded over this period. Look at this:

This type of move usually occurs after a big bear market pullback or correction. The 2023 outbreak occurred immediately after the July-October adjustment. These huge gains are not normal, and similar gains are rare in the future. We need to pause and allow these gains to be absorbed. Additionally, election years historically have weak first quarters, which is exactly where we find ourselves right now. Based on some signs, we were expecting January 2023 to be a hot January, but we don’t expect January 2024 to be anything like that. Election year lows tend to coincide with March.

Currently, the largest sector in the S&P 500 is technology, accounting for 28.79% of the benchmark. Discretionary work accounts for 10.84%, and communication services account for 8.55%. Therefore, these three aggressive sectors account for 48.18%, or almost half of the benchmark. If these three groups only take a few months to absorb their recent gains, it’s easy to see the rotation shift to other areas such as Industrials (XLI), Financials (XLF), or Healthcare (XLV). These three value-focused sectors account for more than 34% of the benchmark. While XLY is in the aggressive sector camp, it actually looks like it could still provide upside for the S&P 500. Find out more about this below.

However, technology (XLK) is definitely one to keep an eye on as it has the biggest impact on the S&P 500. Overestimating technology in this chart only today can create significant risks in the future.

There’s nothing about this chart that looks particularly encouraging on the technical side. The top part of this chart tells us that the relative momentum of the technology has increased significantly, similar to 2020, and we know what happened next. It’s been a long period of average to underperformance compared to the S&P 500.

The middle section of the chart shows that XLK:$SPX relative strength is at the top of a relative uptrend, making it difficult to consistently outperform. In fact, I think it is time to consider weak relative strength in the future. Finally, the bottom panel shows 52-week relative performance. Money has been pouring into the tech sector over the past year. This is similar to 2018. It is not normal for this to continue to rise. Again, this tells us that the risks are bearish and that it is not worth the risk of increasing exposure to current technologies.

Let me make a final point that technology can be relatively fragile. Check out XLK’s 20-year weekly chart.

We are at the top of XLK’s 15-year channel, which has been problematic at every point in this channel, barring the aftereffects of the pandemic. I think it’s time for a bit of a change in leadership.

So all of this raises a big question for me. If a technology is underperforming, where should you look for relative strength?

XLY:

XLY is trading much closer to the lower uptrend line, suggesting that strength can easily be found here.

XLV:

XLV is bullish and has underperformed the S&P 500 for quite some time. The latest breakthrough could be a trigger for the group to spin up more money.

XLF:

Technically, we don’t normally see this group leader. Given the financial crisis of 2008-2009, XLF was a difficult place to make money. However, we believe the group is undervalued as short-term interest rates soar and the yield curve inverts. This situation is likely to reverse in 2024, which should help banks’ net interest margins ($DJUSBK), which is a significant fundamental tailwind. If our economy grows in 2024, it could be a Goldilocks scenario for banks. That means the economy is strong and may even improve, with spreads rising.

It will be very interesting to see how the first quarter of 2024 unfolds. We can’t guarantee you will outperform or underperform in any area, but we believe it will help you assess risks and make more informed trading/investment decisions.

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Happy trading!

tom