After a valiant rally attempt, the Technology sector is hugging the 2,480 zone from below and struggling to gain any material outperformance relative to the S&P 500. For equity bulls, the heaviest sector in the S&P 500 has both the 2,480 zone and the declining 50-day moving average to clear to the upside as hurdles to win over their confidence. Long-term breadth in the space has materially deteriorated in recent trading sessions leading to a potential contrarian opportunity, but the aforementioned hurdles should be cleared to the upside before prudent investors turn bullish.
S&P 500 Technology
After a paltry breakout attempt to recover the March lows at 2,480 to the upside, the Technology sector has once again found resistance at this zone below a steadily declining 50-day moving average. With this sector being the largest weighting in the S&P 500, equity bulls want to see this zone, and the 50-day moving average cleared to the upside to have confidence that the bears have lost control of the sector. Relative to the S&P 500, the group continues its year-to-date pattern of lower highs and lower lows, struggling with the ratio’s declining 50-day moving average.
Software and Services have held the 3,100-breakout level to the upside and are fighting with a flat 50-day moving average. Relative to Technology, the group continues its relative basing pattern, knocking on the ceiling of the highlighted zone above a slightly rising 50-day moving average of the ratio.
Hardware and Equipment have sold off from resistance at the 2,875-breakdown level of early May below a steadily declining 50-day moving average. This is a long-term area that the group has struggled with in the past, and bulls want to see the 2,875-zone taken out to the upside to having confidence that the bears have lost control of the trend. Relative to Technology, the group has broken relative support below the highlighted zone below the ratio’s declining 50-day moving average, giving up the year-to-date outperformance.
Semiconductors and Equipment have sold off from the 2,050 zone after finding resistance at this long-term zone and the declining 50-day moving average. Relative to Technology, the group has made a lower relative high and testing the ratio’s declining 50-day moving average.
After steadily declining for a year, the percentage of Technology components trading above their 200-day moving averages crossed below the 20% mark in yesterday’s trading session. There were 34 instances since 2008 where the percentage of Technology components trading above their 200-day moving average crossed below the 20% level for a median gain of 5.85% with a 66.67%-win rate over the following quarter. It’s worth noting that median gains have tended to peak 39 trading days out at 9.46% on an improved 81.48%-win rate, so consideration should be given to hold times. While these results have been attractive, investors would be prudent to wait for an upside breakout above the 2,480 level and the 50-day moving average to have confidence that this breadth development could work in their favor.
This note is a preview of our Thursday Sector Deep Dive. See our thoughts and more in the full report.
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