US techs back at Club 1999

US techs echo dot com boom

In step with the Nasdaq Composite’s milestone this week of 6,000, the S&P 500 Information Technology Sector index is having a similar, perhaps more important, moment.

S&P’s IT sector is finally challenging levels last seen during the turn-of-the-century dot com boom. Apple, Amazon, Google, Facebook and other giants are lifting the overall market.

Information Technology is the biggest rising sector so far this year, with an almost 15% rise.

In fact the biggest techs aren’t even the best outperformers. Video game group Activision Blizzard is king of the wall with a 44% rise so far this year. Maker of semiconductor manufacturing hardware, Lam Research is next with a 37% rise, followed by radio chip maker Skyworks Solutions, +34%, Facebook, +30.6%, and Amazon, Alphabet and Netflix 17%-23% higher.

In terms of market weighting though, the FANG stocks are indeed doing the heavy lifting. And with the major technology groups’ earnings season in full swing the largest internet and cloud focused groups are on a run of strong quarterly numbers. At the same time, Google-owner Alphabet is locked in a race with Amazon to be the first $1000 ‘new technology’ stock, though that is another milestone of largely artificial importance. Both remain firmly in the shadow of the most valuable company, Apple.

More importantly, Information Technology looks on track to have another pop at its record closing high of 988.49 of 27th March 2000, with a previous monthly closing high of 916.71 that same month. Information Technology was just 6.15% away from its all-time peak at the time of writing. It is, however, difficult to weight the probabilities of whether techs will scale the remaining heights to their record, or fail around current levels before a protracted downturn.

How much of a friend is Info Tech’s Trend?

Whilst momentum studies are technically overbought in our weekly chart below, it’s interesting to note that Info Tech’s Relative Strength Index (RSI) is well below the fever-pitch level it hit in the week to the end of March 2000. That peak however, is a reminder of the frequent unreliability of such gauges, given that the RSI has yet to match its own record above 88 from late June 1995, when the index was around six months old, according to Reuters data.

At 74.487 at the time of writing, the RSI’s historical pattern suggests it can ascend into even thinner air with few ill effects. That said, its recent peaks—since 2014—have not got as far as the standardised ‘80’ marker that is generally regarded as signifying an overbought state.

Adding the Average Directional Movement Rating oscillator (ADXR) gives us a gauge of trend strength (AKA ‘reliability’). It’s less responsive than ADX, invented by legendary price technician J. Welles Wilder, though with smoothed and more refined readings, ADXR is theoretically less likely to throw off false signals. It uses the same 0-100 scale as the ADX. S&P 50o Info Tech’s ADXR is currently at 19.94, well within the range demarcated by Wilder between 0-25, which he classified as denoting an ‘absent or weak trend’.

At the same time, Fibonacci watchers will note the tech market has, since basing at its crises low of 196.48 in November 2008, been approximately tagging iterations of the important 61.8% retracement interval. It has yet to clearly show any approximation of a retracement back to the 261.8% extension of its rise from the cycle low that it breached last month.

One additional fundamental aspect of the trading backdrop is that volumes are widely recognised as exponentially thinner today than they were in the early 2000s. Thomson Reuters data shows peak volume in tech share trading in the week to 19th July 2002 at 5.121 billion. The data provider’s time series ends in the first week of January 2013 (at least according to my Eikon software). Then, just fewer than 23 million techs were traded. The decline in volume might mean the index is structurally more volatile nowadays, and hence less capable of sustaining peaks.

One counterargument is that with a break in March above a lower historical high (887.77: week to 21st July 2000) the Info Tech gauge has established a support. And, it’s worth remembering that oscillators are not reliable gauges of the quantum of moves—even if they are frequently correct in identifying forthcoming direction.

Techs may party on for a while longer at least.

WEEKLY CHART: S&P 500 INFORMATION TECHNOLOGY INDEX