Technology stocks are known for being high beta, which means they can lead the market both up and down, particularly when performance is shaky. Given their significant 30% weighting in the S&P 500 Index, it’s crucial to gauge the current tech sector from a technical view. Analyzing a monthly chart, the Technology Select Sector SPDR showcases long-term uptrends aligned with the monthly cloud model. Recently, however, a bearish crossover in the MACD at the end of March indicated a potential downturn, marking the first “sales” signal since early 2022 and hinting that a cyclical bear market has set in. While the tech sector is technically in a bear cycle now, there’s a glimmer of hope that a secular bull market might emerge by 2026.
XLK, the tech ETF, has rebounded significantly since hitting a low in April. There is a key supply area noted on the chart in the $228-$241 range, where XLK traded within a narrow band from early December to most of February. This zone could serve as a barrier that prevents further upward movement, maintaining the integrity of previous highs. Historically, technology stocks tend to lead upward during rallies but falter during downturns. The recent rise in XLK’s ratio to the S&P 500 is indicative of this outperformance during a market recovery. However, prior to this uptick, the ratio experienced a sharp decline in the first quarter, indicating a bearish shift in the relative strength of XLK. Thus, the current outperformance could be seen as somewhat against the trend and may be temporary. It’s important to watch for signs that indicate maturity in key indicator rallies, as they may prompt a reduction in exposure to high beta tech stocks.
