As global markets battle a pandemic induced meltdown, investors and traders alike are shoring up their portfolios from assets that are being hardest hit from the economic downturn.
While it can seem like there is no recovery on the horizon from the extreme volatility, there are still ways to find opportunity even during a bear market.
One strategy is to invest in robust companies — at cheaper prices — that can weather the storm. From historical market performance data, a strong case can be made for technology stocks.
In an exclusive interview JC Parets, All Star Charts founder and chief market strategist, told Opto why the technology sector’s robustness makes for a strong bullish case.
“I think the big story is technology on a relative basis,” JC Parets states. The technology sector of the S&P 500 has, after all, other segments consistently over the past couple of decades.
While the sector lost more than 80% over two years when the tech bubble burst in 2000, it managed to regain those losses. By 2017 the sector had climbed its way back to its former highs, investment strategist and portfolio manager Rob Isbitts notes in Forbes.
Since then, tech companies have grown to colossal sizes. They now make up some of the world’s largest public companies. Some of the biggest names saw such outperformance that the US had to create a new index for them — the FAANG.
However, the constituents of this group – Facebook [FB], Apple [AAPL], Amazon [AMZN], Netflix [NFLX] and Alphabet [GOOGL] – are not purely in the business of technology, making the sector hard to define.
“A company like Amazon isn't even in the technology sector. It's in the consumer discretionary space and that is what has been driving that area higher,” JC Parets says. “You look at Google and Facebook, they're not in the technology sector either. They're in the communications index, which is why that index has done so well.”
“A company like Amazon isn't even in the technology sector. It's in the consumer discretionary space and that is what has been driving that area higher”
This trend extends across all sectors. Take healthcare for example. It has a lot of different subsectors, from managed health to biotechnology, including medical equipment stocks, which “when you look at the charts, they look like tech stocks”.
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Signals of resilience
The tremendous outperformance in the technology space has not just been in the US but around the world. This has led many portfolio managers to allocate overweight positions in these stocks.
Despite the market’s current condition, JC Parets doesn’t see this changing. “When the stock market falls, technology will come with it, but it'll be one of the first ones to recover. That's been the trend that we've seen and that hasn't changed yet,” he says.
“You know, obviously, we continue to monitor the data but, as I say, whenever in doubt, zoom out. When you look at technology and compare it to those former highs in 2000, the fact that we are nowhere near those levels, I think has to be constructive of a bigger picture – the fact that we still have so much room to go.”
“When you look at technology and compare it to those former highs in 2000, the fact that we are nowhere near those levels, I think has to be constructive of a bigger picture – the fact that we still have so much room to go”
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However, JC Parets believes there’s really no way of telling how long it’s going to take to stage a recovery. He highlights the advice from his predecessor Louise Yamada, managing director of Louise Yamada Technical Research Advisors, who considers that the bigger the crash, the longer the need for repair.
Parets notes that the collapse in stocks and rise in bond volatility in February and March is something we’ve seen before, and from these past experiences we know that this is something that will take time to recover. But recover it will.
“Are we going to retest those highs this year? Maybe but there's really no telling how long it can take,” Parets says.
“I think patience is going to be necessary and more importantly understanding that we can buy the stocks, we can own these indexes, but these are mean reversion trades, right? These are near term opportunities within the context of what we refer to as a hot mess, which is the current environment that we're in.”
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