Are tech stocks hinting at another S&P 500 rally?
The S&P 500 has entered another period of consolidation following third quarter earnings season and ahead of the December meeting of the Federal Reserve in which it is widely expected interest rates will rise.
Notably before the significant fall in US stocks during August, the tech sector lagged the main benchmark. It can be seen in the top half of chart below that the Spider S&P tech select ETF (XLK) composed of the likes of Apple, Google and Facebook underperformed the S&P 500 (SPX) throughout July. It can be seen that during November, tech stocks outperformed.
Since the lows in August, it has been the tech sector that has led the market higher, consistent with its outperformance during the bull market of the past few years. It can be seen in the bottom half of the chart below that the ratio of XLK to XLF has risen supported by a rising trendline. This shows relative strength in the tech sector. October saw a breakout from a rising channel and a similar pattern has setup in November suggesting a possible break higher. A move below the channel and rising trendline would likely negate this bullish possibility.
Chart of the relative performance of XLK versus SPX
Chart source: Bloomberg
A historical precedent of tech sector outperformance leading to strength in the major US benchmark equity index suggests the S&P 500 could be in for another move higher.
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