Wednesday, June 12, 2013

How have technology stocks been doing?

In general, how have tech stocks been performing? As is always the case, much of the answer depends on your reference point.

Below I show the very popular Technology SPDR (XLK), both absolute and relative performance:


Wow, quite a difference in the two charts. The absolute performance of the XLK (upper inset) has remained in a nice uptrend since late last year. However, XLK's relative performance vs. the S&P 500 depicts a much more bearish picture, with relative return breaking down late last year and only recently successfully breaking through the declining trend line. Note also that relative return was able to break out in July 2011, long before absolute return was able to do so in January 2012. For me, relative return is the primary focus since I am expected to beat benchmarks.

Another way of viewing the tech sector -- or any sector for that matter -- is my preferred method, by using an equal-weighted ETF as opposed to market-weighted. The XLK is market-weighted meaning it's a top-heavy representation with larger-cap stocks having a greater influence on the ETF's return. An example of an equal-weighted sector representation is RYT, the Guggenheim Equal-Weight Technology ETF. The two ETFs have a similar number of holdings, the XLK with 77 stocks and the RYT with 71. However, as shown below, the top-10 stocks in the XLK comprise a whopping 63% of its weight, compared to the RYT with its top-10 holdings making up just 18% of its weight.


The RYT being equal-weighted is a much flatter surrogate and in my opinion offers a truer depiction of how the entire tech sector is performing. 

Below I show the relative return (vs. S&P 500) of both the XLK and RYT.

As with the absolute vs. relative charts for the XLK, the relative return charts above are quite different. We've already discussed the relative return of the XLK (upper inset), with its multi-month downtrend recently broken to the upside. Yet consider the relative return of the RYT (lower inset), making a double-bottom last year, successfully breaking through its declining trend line last December, remaining in a solid uptrend and breaking out last month. 

So again, how have tech stocks been doing? Based on the XLK, up until the last few weeks, relative performance vs. the S&P 500 has been very poor for months. However, when considering the RYT, relative returns have been much better, with a low put in last November and a rising trend established since that time. All in all, I would say tech stocks have overall been performing quite nicely and prospects continue to look bullish.

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