The emergence of Technology - A safe-haven trade or something more?
Currencies such as the US Dollar and Swiss Franc, precious metals (gold and silver), low-beta classic defensive income-related stocks (consumer staples, utilities, and healthcare), and US treasuries tend to relatively outperform peers during periods of high market uncertainties and volatilities.
It is unusual to see Technology stocks as a safe-haven trade given the global banking crisis in recent weeks, which led to the demise of Silicon Valley Bank (SIVB), Signature Bank (SBNY), First Republic (FRC), and Credit Suisse (CS). The recent banking turmoil and the Fed tightening policies have sent investors to an unexpected but familiar area of the marketplace – large-cap technology stocks.
The pertinent question remains – is this sustainable, and most importantly, what does this imply for the broader stock market?
Last year S&P Technology (XLK), Communication Services (XLC), and Consumer Discretionary (XLY) were the worst performers, declining 29%, 37%, and 38.5%, respectively. While the SPX Index (SPX) lost 20%, the Nasdaq Composite Index (COMPQ) and the Nasdaq 100 Index (NDX) plummeted 34.5% and 34%.
As of 3/23/23, the top-performing indexes for the year are the Nasdaq 100 Index (NDX +16.36%) and Nasdaq Composite Index (COMPQ +12.62%). During the same period, the S&P outperformers are S&P Communication Services (XLC +17.76%), Technology (XLK +17.25%), Consumer Discretionary (XLY +10.31%), and SPDR S&P 500 (SPY +3.20%).
The Relative Rotation Graph (RRG) continues to show S&P Technology (XLK) and Communication Services (XLC) retaining relative leadership roles as both sectors remain within the Leading Quadrant. The S&P Consumer Discretionary (XLY), or last year’s worst-performing S&P sector, continues to strengthen, moving higher within the Improving Quadrant. At the current pace, XLY will soon enter the Leading Quadrant.
The SCTR study of the top-ranked large-cap names also shows a heavy concentration of Technology names leading the market. Half of the top 10 names ranked by SCTR scores are Technology stocks, including NVDA, FSLR, ANET, AMD, and SE. Another 4 Technology names (STM, FICVO, SAP, and UMC) also appear within the top 20 ranked SCTR list.
Another technical study of the SPX Index universe further suggests rotation into the Technology sector. A scan of SPX stocks trading above their 50-day and 200-day moving averages produces only 86 SPX names or 17% of SPX stocks in solid intermediate-to-long-term uptrends. However, 29 names, or 34%, are SPX Technology stocks. The next highest concentration of SPX names was Healthcare, with 14 SPX names. The study shows a lack of market breadth and broad participation in the recent rally. However, if breadth expands to other sectors, this will further solidify the October 2022 low as a market bottom and reaffirm a sustainable intermediate-term recovery.
Structural changes in inflation and interest rates can create opportunities and risks for investors. Sectors that have benefitted from disinflation and declining interest rates (i.e., Technology, Communication Services, Consumer Discretionary, and growth stocks) perform poorly in an environment of rising inflation and interest rates. Rising inflation and interest rates tend to favor Financials, Real Estate, Energy, select Healthcare, select, Commodities, and value stocks.
History suggests new bull markets tend to lead to changes in market leadership. Former leaders often give way to new emerging leaders that are often better suited to participate in the new economic environment.
Is the rotation back to Technology, Communication Services, and Consumer Discretionary sectors a temporary shift as investors flee the financials?
Are the sharp selloffs in stocks and, specifically, in Tech and Telecom the previous year a powerful but short-lived cyclical bear decline and not the beginning of a structural bear or trading range market?
Does this imply the structural bull trend that began in May 2013 has resumed?
Does this also suggest inflation may be subsiding and interest rates (yields) are reversing?
Time will tell. The truth or the result will be known in the future, soon after the events have occurred.