A favorable continuation signal for tech stocks
Comedian/actor Steve Martin once posited a plan to get super rich: "First, get a million dollars, then…" He was probably not wrong. In the markets, one of the best ways to take advantage of a bullish trend is to "First, wait for a bullish trend to develop, then wait for a continuation signal." We just got one in the technology sector.
The signal I am referring to involves waiting for the XLK Component Correlation indicator to cross below 0.65 while XLK is above its 150-day moving average. Price above the 150-day average tells us we are currently in a bullish trend, and the Component Correlation signal serves as a bullish continuation signal.
The tables below summarize XLK performance results and display returns on a signal-by-signal basis, including overlapping signals. The key things to note are 1) the potential for choppiness during the first three months after a signal, and 2) the 96% Win Rate for 1-year returns.
Let's run the following test: Anytime we get a new signal, the holding period is extended by one year. So, if one signal occurs and another overlapping signal occurs within one year, we extend the holding period for another year.
Does the signal on August 5th guarantee smooth sailing and higher tech stock prices a year from now? No and no. Should investors continue to give the tech sector the benefit of the doubt? History suggests the answer to that question may be "Yes."