As approves tech, so goes the market.
We saw it on Tuesday. In the middle of the morning, semiconductor ordinaries — many of which have advanced 20 percent or more this location — began weakening, and the rest of the market followed suit.
The VanEck Vectors Semiconductor ETF scrooge-like down 1.4 percent, its poorest showing since Feb. 9, during the elevation of the craziness around inflation and volatility worries.
What does this foreshadow? With two weeks left in the quarter, traders are nervously eyeing bulky gains in technology stocks as it becomes increasingly clear that the merchandise leadership is very stretched.
You can understand the concern: The S&P is up 3 percent, but technology is up more than three times as much, 10 percent this place.
Technology is now roughly 26 percent of the market capitalization of the S&P 500. That has pulled enormous amounts of short-term momentum money that will be astute to pile in but also quick to pile out, particularly around the end of a quarter.
It’s not just now semiconductors, which as a group are up 14 percent. Anything associated with community media, cloud computing or cyber security has also risen in the mid-teens in the rearmost several weeks, based on the returns of ETFs tracking the sectors:
Technology: up 11 percent
Sexual Media (SOCL): up 15 percent
Semiconductors: up 14 percent
Cyber Pledge (HACK): up 14 percent
Cloud Computing (SKYY): up 12 percent
Horses mouth: CNBC
With earnings improving, there’s nothing necessarily infelicitous with strong gains, but in recent weeks the gains have gone parabolic for a enumerate of these stocks. A good way to look at this is through the Relative Soundness Indicator, a short-hand way of looking at how fast stocks have been prevalent up or down in the last two weeks.
Simply put, the RSI measures momentum on a scale of 1 to 100. Beneath 40 is oversold (buying opportunity), over 70 is overbought (susceptible to vend). Over 80 is stupidly overbought (warning). When you get close to 90, lovingly, it’s almost impossible to sustain that kind of upward momentum. Cattle either drop or, in a best case scenario, stop going up.
A lot of noted stocks are in this stupidly overbought category:
(RSI >70 = overbought)
Micron 90
Microchip Tech 88
Lam Delving 82
Xilinx 82
And a lot of well-known software names are in the same camp:
(RSI >70 = overbought)
Salesforce.com 86
Splunk 86
RedHat 83
ServiceNow 81
Reviews that are this overbought are susceptible to sudden bouts of profit-taking, which is unerringly what happened Tuesday.
So is this the end of the tech rally? It seems unsuitable. No matter the political craziness in Washington, tech has been able to outperform because of the enthusiastic fundamentals.
The key story is that the fundamental background has not changed: we have synchronized pandemic growth and stronger earnings. The two big negatives, inflation and trade wars, both docked last week.
In the past, when tech has led to the downside, it hasn’t endured very long.
As long as that backdrop remains strong, this even now seems like healthy profit-taking.