A steady rise in Technology suggests further upside

Key points:

• The S&P 500 Technology sector has avoided a 10-day low (close) for 61 sessions
• After similar win streaks, the sector was higher 83% of the time over the next two and three months
• A relative comparison versus the broad market suggests Technology will outperform

Should we continue to ride the bullish momentum in Technology?

As the Technology sector continues its bullish run, anxiety among investors escalates. The dilemma for market participants who joined the Technology rebound this year is whether the sector's upward momentum has become excessive, prompting them to assess the possibility of taking profits. For traders who missed the rally, the primary concern is whether to jump on board after witnessing such a substantial price increase.

To limit human emotion that plagues investors of all types, Sentimentrader employs a quantitative approach to research that emphasizes analysis over emotion.

For 61 consecutive sessions, the S&P 500 Technology sector has refrained from closing at a 10-day low, establishing the longest win streak since the post-COVID melt-up and ranking as the 11th most significant count in over 70 years.

Let's assess whether avoiding a 10-day low (close) for 60 sessions foreshadows a bullish or bearish outlook for the Technology sector so we can remove emotion from our decision-making process.

Similar win streaks above the 10-day low preceded additional gains

When the S&P 500 Technology sector avoids a 10-day low (close) for 60 sessions, the bullish price momentum for the group is likely to continue over a medium- and long-term horizon. The best opportunity to add exposure comes in the first few weeks, when the sector shows a coin toss win rate.

Drawdowns were remarkedly low in the first three months, with only one precedent greater than -6%. Over the next two, three, and six months, the max gain exceeded the max loss in 11 out of 12 instances.

Favorable conditions in the Technology sector bode well for the broad market. Over the next two months, the S&P 500 was higher in all but one case and that instance showed a minimal decline of only -1.3%. The 1957 instance is the only time a signal occurred within the context of a bear market.

The S&P 500 suffered only one max loss greater than -5% over the next three months. A year later the max gain exceeded the max loss in 10 out of 12 precedents. 

Can Technology continue to outperform?

When I compare the S&P 500 Technology sector to the S&P 500, the potential for Technology to continue outperforming the broad market looks promising, especially over the next 12 months.

What the research tells us...

Over the last 60 sessions, the Technology sector has consistently stayed above a 10-day low (close), reflecting a bull market environment rather than a bear market one. After similar win streaks, the Technology sector was higher 83% of the time over the next two, three, and twelve months. While large-cap stocks delivered excellent returns, investors reaped more significant rewards by favoring the Technology sector over the S&P 500.