A significant shift in the Technology sector

Key points:

• A composite trend model for the Technology sector recorded a significant bullish surge
• Similar trend score shifts displayed solid returns and win rates over the following three months
• Technology tends to outperform the S&P 500 over medium and long-term horizons

Stay with the leaders until further notice

When stocks enter a correction during a bull market, it's crucial to keep a close eye on the leading sectors and industries to gauge their strength or weakness in the drawdown phase. Should these groups maintain favorable absolute and relative trend configurations, it typically suggests they will continue to lead once the correction concludes.

Technology was one of only two sectors to maintain a positive absolute and relative trend score during the 10% correction in the S&P 500. Communication services was the other group.

For only the 50th time since 1952, a composite trend model for the Technology sector registered a week-over-week increase of nine points or more. However, if I include a condition that requires the overall composite score to be seven or greater for context similar to now, the study identified 22 historical precedents. 

The composite trend model utilizes a scoring system of +1 for favorable trend conditions and -1 for adverse trend conditions. 

Similar trend score changes preceded positive returns

Whenever the composite trend score for the Technology sector experiences a surge of nine points or more in one week, the improvement in trend indicators usually paves the way for a bullish upward bias in the sector for the following three months. Over that same time frame, the sector was higher at some point in all but one instance, albeit two precedents were marginal gains.

Relative performance

Excluding the first week, the Technology sector tends to outperform the broad market across medium and long-term time frames.

Absolute and relative rankings

When evaluating trend scores, Technology and Communication Services consistently lead the pack. As a result, my preference continues to favor growth-oriented sectors instead of value-based ones. 

The iShares Growth ETF (IWF) continues its winning streak, outpacing the Value ETF (IWD) and achieving a new six-month high today. You can find the growth versus value timing system on our website under the Tools-Strategies tab. It's called the Growth vs. Value Relative Rato Rank System.

What the research tells us...

Technology, a year-to-date market leader, witnessed a substantial uptick in bullish trend-following indicators. As a result, a composite model surged by one of the most significant week-over-week readings in history. After similar thrusts, the sector showed a consistent upward bias over the following three months. From a comparative perspective, it outperformed the S&P 500 over medium and long-term horizons. With Technology and Communication Services maintaining a leadership status, I would favor growth over value.