Research Excerpts

Technology Sector: Will It Lead Or Bleed Into Year End?

Posted on: Wednesday, November 6th, 2013

In our July 29th Research Excerpt, entitled Technology Sector: How Current Asset Flows May Affect Q3-Q4 Performance, we pointed out that our own asset flow-based metric (a pie chart, click the previous link to view it) was indicating that Technology was at an historic under-invested extreme versus the other sector of the S&P 500, one which had previously led periods of both outright strength and relative sector outperformance.

The green highlights on the chart below show that, as expected, the Technology Sector SPDR ETF (XLK) has outperformed the S&P 500 ETF (SPY) by 4% between July 23rd and August 21st, and is currently hovering just below that August extreme in relative sector outperformance now.

Meanwhile, XLK has risen by 7% on an outright basis during the same period.

Chart 1

Daily Relative Performance Of XLK vs. SPY Since January

Moreover, our sector asset flow metric (subscribers can login to the Research Center to view the updated version of the pie chart) suggests that there still may be room for more eventual relative sector outperformance by Technology, perhaps over the next 1-2 quarters.

Near term, however, our next chart warns that the Technology Sector may be getting tired.

Chart 2

XLK & Percentage Of Holdings Trading Above 200-day MA

The blue highlights point out that XLK is currently making higher highs on a declining number of constituent stocks that are trading above their 200-day moving average.  This negative divergence between price and market breadth is characteristic of a waning trend, and warns of some potential near term weakness for market-leading Technology between now and year end.

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