A powerful indicator combination for technology stocks is in play
One of my favorite combinations of indicators (that almost no one else is even aware of) is Component Correlation and Insider Buying.
Corporate Insider Buying - XLK shows the total number of corporate insiders of companies covered by the XLK ETF that have bought shares on the open market during the past six months. Because insiders typically only buy if they have confidence that their company (and stock) will do well, insider buying is considered a stronger signal than insider selling. When buying picks up quickly and dramatically, it tends to be a very good sign for the stock market.
XLK Component Correlation shows the correlation among members of the S&P 500 Technology sector. During times of panic, investors tend to buy or sell "everything" together, no matter their individual merits, so correlation rises. The higher it goes, the more we see groupthink, which tends to happen at times of extreme pessimism, and is thus usually a positive for stocks in the future.
When both indicators are at a high level, it tells us that:
- The insiders are bullish
- The investing masses are wary
This is not a "precision market timing" tool, but it tends to be a good time to accumulate shares.
To view these two indicators together, I first select "Corporate Insider Buys - XLK" from the "Indicators | Stock Indicator List" menu. Then, in the lower right-hand corner, select "Choose a Secondary Indicator" and start typing "XLK Component Correlation" and select that indicator.
Below we see Insider Buys above 17 and Component Correlation above 0.70 during the 2011-2012 weakness. XLK rallied 75% over the next several years.
2022 we saw another period of high insider buying and component correlation. XLK has advanced over 50% in two years.
At the far right of the chart above, we see another period of strong insider buying and high component correlation happening in real-time. Does this guarantee a continued rally for XLK? Not necessarily. But history suggests giving the bullish case for tech the benefit of the doubt until it gives a reason not to.