If diversification is the key to long-term investing success, then tech stocks’ latest rebound offers hope that the sector’s 2023 rally hasn’t run out of steam yet.
Much of the skepticism around the rally at the beginning of 2023 was because of its reliance on just a small handful of Big Tech winners, namely,
Tesla
(ticker: TSLA),
Nvidia
(NVDA),
Meta Platforms
(META),
Apple
(AAPL),
Microsoft
(MSFT),
Alphabet
(GOOGL), and
Amazon.com
(AMZN).
However that winners’ circle began to expand as the year went on, a pattern that has reasserted itself after tech’s brief selloff in August. The sector’s latest rebound has been founded on broad-based gains, with a majority of tech stocks advancing from their August lows, rather than just a few heavyweights.
That breadth bodes well for ongoing tech returns, according to analysts at market analysis firm SentimenTrader. History shows sharp tech rallies driven by a variety of sector stocks tend to presage medium- and long-term gains.
As the firm notes, more than two-thirds of tech stocks have advanced from their selloff in just 10 days. In the past five years, a sentiment reversal that fast has happened only twice before after the sector had gone more than six months without a similar thrust—a technical indicator of stock momentum. In October 2022 and February 2018, both of those signals preceded sustained gains, particularly over the following three- and six-month periods.
In 2018, the swift 10-day tech climb came before three-month and six-month gains of 3.6% and 9.2%, respectively, while in 2022, tech stocks rose 5.5% over the next three months and 16.5% over the following six months. Going back to 1952, this pattern preceded an 82% win rate for the sector over the next six-month period, and a 14.3% median return, “well above a random return,” the firm notes.
Of course, some investors might still feel nervous, given that tech is near-a multiyear high, and that the quick move up for the sector could herald a blow-off—a technical term for when a chart goes up sharply only to then fall into a similarly sharp decline.
However, SentimenTrader notes that here too, history is on the side of more gains for tech. The firm looked at seven instances when swift, wide-breadth tech thrusts came when the
S&P 500 Information Technology
sector was above its 200-day moving average—and was within 5% of its previous three-year high. SentimenTrader found that only once (in 1980) did a blow-off follow. And after double-digit losses in that instance, tech then embarked “on one of the great bull runs of all time,” the firm notes. The other six signals came ahead of medium- and long-term gains.
Overall, investors haven’t needed much motivation to buy tech stocks this year. But for those worried about how quickly the sector has whipsawed from 2022’s selloff, history provides some evidence that the most recent gains don’t offer false hope.
Write to Teresa Rivas at [email protected]
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