by Ryan Detrick, LPL Research
With equity markets breaking out across the board, the real winner so far early in 2017 has been the Nasdaq. In fact, it has made new all-time highs on six consecutive days for the first time since December 1999. Anytime we see “December 1999,” it brings back bad memories of what was right around the corner for tech stocks (about a 90% drop) and the first three-year bear market for equities since the Great Depression.
So, is this another major warning sign for tech and maybe even the equity markets as a whole? Fortunately, we don’t think so, and here are some reasons why. For starters, when you hear Nasdaq, you think of tech stocks. Here’s the catch: Tech stocks don’t make up nearly as much of the Nasdaq as they once did. Incredibly, tech is less than half of the Nasdaq today. This could be a positive sign, as this influential group isn’t seeing the type of love it did 18 years ago, and the Nasdaq isn’t so top heavy in one group.
Earnings season has gone very well for technology, as earnings have jumped nearly 11% year over year, with only financials sporting a larger gain. Given these two groups are also the largest components of the S&P 500, we like what we are seeing on the earnings front.
Last, let’s take a look at just tech—not the Nasdaq. Doing this shows a much different picture, as tech is nowhere near the relative strength leader it once was. In fact, the Dow Jones U.S. Technology Index isn’t even above its peak from 2000 yet! Hard to say something is in a bubble if it isn’t even at new highs yet.
Per Ryan Detrick, Senior Market Strategist, “Tech has lagged the overall S&P 500 for nearly 17 years now. When you compare the tech group versus the S&P 500 on a relative basis, a potentially bullish saucer bottom* appears to be forming. Should tech continue to outperform in 2017, this will confirm the breakout and tech could have substantial room to run.”
There’s a popular old technical analysis saying that “the longer the base, the higher in space,” meaning the longer something bases, the more significant the move higher might be when the eventual breakout takes place. Above is one of the better looking examples of this pattern that you’ll ever see**.
* The saucer bottom pattern indicates that a stock’s price has reached its low and that the downward trend has come to a close.
** The yellow line in the above chart is a saucer bottom. The shape is like a saucer and it is a widely followed technical formation.