ETF Insights| October 1, 2024
Technology shares have stabilized since their mid-summer correction. The longer-term outperformance trend has consolidated since July but remains intact.
Price Action & Performance
The XLK has continued to consolidate since making all-time price highs in July. The sector briefly traded above near-term resistance at the $227 level on September 26 before pulling back to end the month. However, that was enough to trigger a MACD buy signal on top of a neutral RSI reading which registers as a positive input in our oscillator work.
At the industry level, we’ve seen Software and Semiconductors continue to lag in the near-term while IT Services, Electronics, Hardware and Comm. Equipment Industries improve. The sector in aggregate achieved a small relative gain in September vs. the S&P 500 but has lagged over the 3-month period. From a technical perspective this comes down to the strength of the longer-term trend animating the sector vs. the newer opportunities. In cycles of the recent past, deflationary environments have benefitted Growth stocks. If that pattern continues, we want to be long XLK going forward based on what we see from our macro inputs at present.
At the stock level our favorite names are GDDY, ITT, FICO, MSFT, ORCL, PANW, NOW, PLTR, ANET, ZBRA, AVGO, KLAC, MPWR, NVDA. We remain constructive on AAPL as well along with several others.
Economic and Policy Drivers
A change in expectations on interest rate policy has sparked near-term rotation away from Technology shares. However, in the longer run, we expect lower rates to catalyze a continued bull market which should be a tailwind to the XLK. The upcoming presidential election season will likely increase uncertainty around foreign policy which has potential to cause elevated uncertainty for sourcing and production. This is an area of major contrast between the two candidates. However, both candidates are aligned with certain Tech surrogates, and are unlikely to court a powerful adversary in the Tech lobby.
Advancements in AI, continued demand for cloud computing, favorable policy like the CHIPS Act remain tailwinds to the sector. A concentration of users in the P/E space is a potential worry as those businesses may artificially inflate the user base of Tech. services. However, with interest rates moving lower, PE is likely getting some relief through decreased funding costs.
In Conclusion
We expect the inter-play between AI builders and AI users will be a continuing theme underpinning the bull market. The 18 months from January 2023 through June 2024 were dominated by XLK. Now tracing out an intermediate term consolidation we expect “FOMO” investors to pick up the trade into year-end. Our Elev8 Sector Model starts October with an OVERWEIGHT allocation of 3.87% for October.
Chart | XLK Technicals
- XLK 12-month, daily price (200-day m.a. | Relative to S&P 500 | MACD | RSI)
- XLK is consolidating its attempted bullish reversal. The bet here is this intermediate term consolidation will be accumulated sooner than later
XLK Relative Performance | XLK Industry Relative Performance | 3-Months
XLK Street Analyst Ratings and Price Targets:
The street has gotten more bullish on XLK as 2024 has progressed.
Data sourced from FactSet
