Tech Stocks Rebound: Diversification Signals Continued Rally

If diversification is the key to long-term investing success, then tech stocks' recent rebound offers hope that the sector's 2023 rally hasn't run out of steam yet.

Expanding Winners' Circle

At the beginning of 2023, skepticism surrounded the rally due to its reliance on a small handful of Big Tech winners, including Tesla (TSLA), Nvidia (NVDA), Meta Platforms (META), Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), and Amazon.com (AMZN).

However, as the year progressed, the winners' circle began to expand, and this trend has continued following tech's brief selloff in August. The sector's latest rebound has been built on broad-based gains, with a majority of tech stocks advancing from their August lows, rather than just a few heavyweights.

Positive Sign for Ongoing Tech Returns

According to analysts at market analysis firm SentimenTrader, the breadth of this rebound bodes well for ongoing tech returns. Historical data shows that sharp tech rallies, driven by a variety of sector stocks, tend to indicate medium- and long-term gains.

The firm notes that more than two-thirds of tech stocks have advanced from their August selloff in just 10 days. Over the past five years, a sentiment reversal of this speed has only occurred twice after the sector had gone over six months without a similar surge—a technical indicator of stock momentum. In both October 2022 and February 2018, these signals were followed by sustained gains, particularly over the subsequent three- and six-month periods.

Tech Stocks: A Pattern of Consistent Growth

In the world of investing, tech stocks have historically shown a consistent pattern of growth. This is evident when examining past data, where swift climbs in technology stocks were often followed by substantial gains in the subsequent months.

For instance, in 2018, tech stocks experienced a 10-day climb, which was then followed by gains of 3.6% and 9.2% over the next three and six months, respectively. Similarly, in 2022, tech stocks rose by 5.5% in the following three months and an impressive 16.5% in the subsequent six months.

Taking a broader perspective, this pattern has held true since 1952. In fact, it's worth noting that after similar swift climbs, the sector boasted an 82% win rate over the next six-month period. Moreover, the median return during this period was a noteworthy 14.3%, well above what would be expected from random fluctuations.

Despite these promising statistics, some investors might still have concerns due to the current high levels of tech stocks. They may worry that the rapid ascent of the sector could be a precursor to what is known in technical terms as a "blow-off," where a sharp increase is followed by an equally sharp decline.

However, analysts at SentimenTrader offer reassurance by highlighting historical data. They found that during seven previous instances of swift tech climbs, when the S&P 500 Information Technology sector was above its 200-day moving average and within 5% of its previous three-year high, only one instance resulted in a blow-off. Even then, after experiencing double-digit losses, the sector went on to embark on an exceptional bull run.

In summary, while some investors may have concerns about the swift movements of tech stocks in recent times, historical data suggests that these gains are not just temporary illusions. As such, investors may find solace in the fact that the current trajectory aligns with past patterns of consistent growth.