Today, we look at recent movement within risk-on areas and how it serves as an example not to follow everything in our noisy markets.
Last month was not kind to risk-on stocks, many of which were areas of relative strength. Technology had its worst month since March, seeing the State Street Technology Select Sector SPDR ETF (XLK) fall 4.8% to move into correction territory. Meanwhile, we saw underperformance from other previously favored areas, with the vanguard growth ETF (VUG) and Invesco S&P 500 high beta fund (SPHB) also stumbling. Much of the selloff in growth and high beta areas was driven by the buzz of a potential bubble, with Google searches for “AI Bubble” this year peaking mid-November. During periods of pullback, it can be tempting to ignore the long-term picture instead hone in on recent changes and narratives. Some of reader may have been tempted (or still are) to sell out of the previously mentioned areas due near-term movement and rumors. However, those who listened to the noise would have missed out on the upside of the last two weeks.
Even with the dip last month, those risk-on areas continued to hold some of the most long term strength within domestic equities, comfortably remaining groups to own. Action over the last two weeks has seen those same names bounce back. Looking again at tech representative XLK, the fund has now traded higher on ten consecutive trading days, which is the longest streak for the sector since September 2020. Technology remains at the top spot of DALI while XLK holds an extremely strong fund score of 5.46, highlighting the significant strength of the broader sector.
Additionally, it hasn’t just been the largest names pushing the sector higher. The bullish percent for Technology (^BPECTECH) was in washed out territory below 30% last month, but the indicator has since reversed back up into Xs. Reversals from below 30% are one of the most positive developments on a bullish percent chart, which bodes well for technology going forward.
Additionally, it hasn’t only been technology that rebounded over the last two weeks. Growth stocks also took a hit in November, leaving VUG on a streak of two consecutive sell signals. However, action at the very end of November saw the fund break a double top at $490 to move back to a buy signal. Meanwhile, high beta stocks have regained their foothold over risk-off areas of the market, with SPHB trading at all-time highs again. The high beta fund previously reversed into a column of Os on its 3.25% RS chart versus the Invesco Low Volatility Fund (SPLV). However, this week allowed high beta stocks to regain near-term strength versus the low volatility fund, serving as another risk-on sign.
As is often the case, the long-term strength of the marker’s leaders have won out over the noise in the market for now. The weight of the evidence continues to favor risk-on areas, especially as they rebound and reverse higher. Technology and growth stocks will eventually fall out of favor at some point in the future, but there’s no need to sell those groups until we see a substantial decline in their long-term strength, despite what market narratives may say.
