February 14th, 2023

Time To Burst The Tech Bubble?

In yesterday’s article, I looked at various sectors and showed how some of the defensive sectors were rising to the top of the performance charts and gave two different scenarios depending on where you saw the market going.

I took some heat from some readers who were quick to point out that tech was the best-performing sector yesterday, leading into the important CPI report today.  The defensive sectors like Energy, Utilities, and Healthcare fell to the bottom after being last week’s winners.

If you go back to yesterday’s article, I mentioned two different paths the market could go depending on whether investors are willing to get back into riskier sectors. Let me show you why I think tech could see some trouble from here.

Before we get into why I think Tech might be in for a pullback, I want to let you know I don’t have a trade setup for you today. I want to see how the market reacts to the CPI report before we get into specific trades.

Ok, back to the Tech sector…

The chart is the SPDR Technology ETF (XLK) and I used a MACD with the standard 12, 26, and 9 settings. The MACD is a moving-average convergence/divergence indicator measuring the distance between two moving averages – in this case the 12 and 26 moving averages. The indicator gives a higher reading if the two moving averages are pulling away from one another. Like a rubber band, once the moving averages are pulled away from each other, they will eventually snap back and close together.

In the last three years, the MACD has risen above the 3.0 threshold four times. I then looked at the moment the MACD crossed over 3.0 until it fell back down below 3.0 and I measured how high the ETF rose in price from the cross-over date to the highest high (assuming you somehow could have timed the perfect trade).

The first time this happened, the XLK rose 8% from the time the MACD crossed 3.0 to the highest high when the MACD was above 3.0. The next two times it rose 4% and 5% before heading lower.

We just hit the 4% level yesterday and even with the strong move higher in the market, the MACD of the XLK is headed down (or flat) from where it was a couple of days ago.

What does it all mean? Sure, XLK could be setting up for another leg higher from here and I could be completely wrong about expecting a pullback from here.

That doesn’t mean I won’t trade stocks within that sector, but for me, this means scaling back on position size in this sector. I personally don’t want to be loaded up on tech right now. I’ll be prepared to jump back in If I’m wrong about the direction, but for now, I’m ok taking some profits off the table.

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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.