Technology shows more signs of short-term exhaustion

Key points:

• Over the last month, the S&P 500 Technology sector has registered 13 multi-month relative highs
• Similar periods with a significant number of relative highs suggest near-term exhaustion for the sector
• Investors should not lose sight of the big picture, as an abundance of relative highs is typically bullish long-term

Relative trends for Technology suggest a pause that refreshes a bullish trend 

Last week, I highlighted the overbought condition in the S&P 500 Technology sector by comparing the group to a short-and long-term moving average, which suggested near-term price exhaustion. i.e., the sector has gone up too far too fast.

Price exhaustion can also be measured relative to a benchmark like the S&P 500, indicating that a sector or stock exhibits significant relative momentum versus a broad basket of stocks.

Over the last month, the S&P 500 Technology sector registered a multi-month relative high versus the S&P 500 in 13 out of 21 sessions, a phenomenon that has only occurred 13 other times since 1957 when including a condition requiring a 3-year absolute high for the sector. 

Similar relative trends suggest that Technology could struggle in the near term

Whenever the S&P 500 Technology sector registered 13 or more multi-month relative highs versus the S&P 500 in 21 sessions and simultaneously closed at a 3-year high, it tended to struggle over the following month, with 11 out of 13 instances showing a loss at some point during that period. Additionally, over the subsequent three months, the median maximum loss exceeded the maximum gain in each time horizon.

Suppose stocks are not approaching a market peak like those observed in December 1999 or July 2007. In that case, the long-term outlook indicates that investors should treat any pause as a typical consolidation within a bull market. 

While Technology faced challenges over the ensuing month after hitting numerous relative highs in quick succession, defensive sectors such as Staples, Health Care, and Utilities displayed gains and relative outperformance versus cyclical sectors. Nonetheless, a year later, the S&P 500 Technology sector emerged as the top performer, indicating that long-term investors concentrating on the current innovation theme, AI, need not panic during a potential pullback. 

Absolute and Relative Trend Scores

The absolute and relative trend scores, which gauge medium- to long-term trends, remain positive for the Technology sector. Nevertheless, a higher percentage of stocks are hitting one-month relative lows compared to relative highs against the S&P 500, though the difference is slight. 

This phenomenon underscores a split market even within the leading sector. 

What the research tells us...

The S&P 500 Technology sector has recorded numerous multi-month relative highs against the S&P 500 over the last month. Historically, when a stock or sector experiences significant outperformance in a short period, it typically consolidates these gains by pulling back in a bullish consolidation pattern. Currently, the Technology sector is in such a scenario. Traders should exercise caution in the near term as choppy market conditions could prove frustrating. Long-term investors, however, should refrain from panicking as the overall outlook remains constructive.