With Technology simultaneously improving its long-term strength while potentially entering overbought territory, how should investors approach the group?
As recently as last month, some market participants were speculating that technology could be entering a bear market. Since then, sentiment has swung sharply in the opposite direction, with Technology leading the market to the upside in recent weeks. The Technology Select Sector SPDR Fund (XLK) is up roughly 17% in April, putting it on pace for its strongest calendar month since October 2002. As a result, tech has risen from fifth to second place in our DALI sector rankings. Meanwhile, XLK has regained near-term market relative strength, pushing its fund score up to 5.63, which is the highest among the major sector SPDR funds.
Within Technology, leadership remains highly concentrated in semiconductors, while software and cybersecurity stocks have acted as a drag so far this year. The VanEck Semiconductor ETF (SMH) is up 33.8% YTD, whereas the First Trust NASDAQ Cybersecurity ETF (CIBR) and iShares North American Tech-Software ETF (IGV) are down 6.8% and 20.9%, respectively. In fact, semiconductors rank at the very top of the NDW group matrix, while SMH holds a near-perfect fund score of 5.94, arguably making semiconductors the strongest area of the market. But, as is often the case with seemingly perfect things, there’s a catch…
While momentum‑based strategies welcome strong gains, advances that are too sharp can push prices into overbought territory, increasing the risk of near‑term consolidation. NDW’s Overbought/Oversold (OBOS) readings attempt to quantify how extended a security is relative to its prior ten weeks of price action, with readings north of 70% indicating significantly overbought conditions. XLK currently sits at an elevated—though not egregious—intraday reading near 100%, while SMH is at approximately 135%, matching its highest levels on record. Historically, readings at these levels tend to signal muted performance over the following two weeks rather than a deterioration in the longer‑term trend. Notably, this rebound follows a sharp move up from previously oversold conditions, suggesting that the magnitude of the shift may be more informative than OBOS readings alone.
There are 21 other instances where XLK gained more than 10% in a calendar month. In those prior instances, the fund typically cooled off, averaging flat performance over the subsequent six months and a modest 5.1% gain over the following year. However, previous instances occurred disproportionately during inflection points. One‑third of those episodes occurred during the dot‑com bubble period (Late-99 to Mid-02), with tech falling 30% or more each time over the next year, pushing averages meaningfully lower. By contrast, the remaining two‑thirds preceded highly bullish periods, averaging a 27.8% one‑year return outside of the dot‑com bubble. Regardless of whether the current environment ultimately proves to be bubble‑like or not, extreme months such as this tend to precede elevated volatility, both to the upside and downside. Given how extended semiconductors have become, the group may experience even greater volatility than the broader Technology sector.
Overall, technology remains an important area of emphasis within portfolios due to its long‑term relative strength. Portfolios currently underweight technology may want to exercise patience before adding exposure given the sector’s near‑term overbought condition. Those with existing technology exposure, especially within semiconductors, should continue to maintain those positions. That said, if historical parallels are any guide, the sector could experience elevated volatility in the months ahead, making technology an especially important area to monitor, particularly should movement begin to resemble prior bubble‑like periods.
