When the trade war started at the beginning of 2018, most investors expected it to take a toll on certain sectors more so than others. Many expected it to hurt the industrial sector and the tech sector more than others. Despite the concerns, the tech sector has continued to climb and has doubled the returns of the overall market.
Using the Technology Select Sector SPDR Fund (NYSE: XLK) as a barometer, the sector has gained almost 39% from the beginning of 2018. For comparison purposes, the S&P has gained just shy of 16% during the same period. In terms of the 10 main sectors, half of them have moved up more than the S&P and half have underperformed the index.
The tech sector has outperformed the S&P and all other sectors since the beginning of 2018. Of course, the trade war really started at the end of January 2018. One of the key points of contention in the trade war has been China’s policies toward protecting intellectual property rights. That is why investors expected the tech sector to be one of the sectors hit the hardest by the dispute.
Looking at the weekly chart for the XLK we see that there have certainly been times when the sector has dropped sharply in short periods of time, but the overall trend has mostly been to the upside. The fourth quarter of 2018 was more than a slight pullback. From the beginning of October ’18 to the low on Christmas Eve, the XLK fell 23.2%. The only sector that dropped more during that period was the energy sector.
From that low on Christmas Eve, the XLK has gained over 50%. We see that the fund closed below the 104-week moving average (two years of data) for one week and then took off on a nice rally. If we step further back and look at a monthly chart for the last 13 years, we see an even more incredible run for the XLK.
From the low at the end of the last bear market in March 2009, the XLK has gained right at 650%. That is an incredible return in just over 10 years and that is on a well-diversified exchange-traded fund.
Two things jumped out at me on the monthly chart. One is how the fund hasn’t closed below the 24-month moving average since mid-2009. Secondly, the 10-month RSI and the monthly stochastic readings have only been below the midway points of their ranges one time since 2009 and that was last December.
Obviously, the run can’t last forever and there will be a correction at some point, but no one knows exactly when that will be. The economy has been expanding since the recession in the first decade of this century so there hasn’t been much negative news to slow the rally. The concerns over the trade war have been valid and yet the XLK has continued to move higher with each piece of good news out of the trade talks. Perhaps it will take another recession to halt the rally.
This particular point in time doesn’t really look like a great time to enter a position on the XLK with the fund in overbought territory on the daily, weekly, and monthly charts. However, if the fund were to pullback again and get down near the 104-week or 24-month moving average, that could be a well-timed entry into a bullish position on the XLK. Something to keep an eye on as to whether it is just a pullback or the start of something worse would be the position of the 52-week moving average compared to the 104-week. In the bear markets in 2000-2002 and 2007-2009, when the 52-week moved below the 104-week, the fund fell further. If you had entered at the peak, you would have experienced a sizable loss even if you got out when the 52-week dropped below the 104-week. However, if you had entered when the fund hit the 104-week and exited when the 52-week fell below the 104-week, your loss would have been significantly less.
Personally, I will be looking for the next opportunity to enter a long position on the XLK. I will try to enter near the 104-week and will close out the trade if the 52-week moves below the 104-week.