This Sector Is Signaling the Tech Rally Isn’t Over Yet

In all my time on Wall Street, there was one question I would get from other investors and traders that always irked me…

“So what do you think?”

As soon as someone asked me that question, I would answer with something generic like “It could go either way.” I did this because I came to realize that 95% of people on Wall Street don’t actually care what you think… They just want you to hear what they think.

They would ask the question just to start the conversation so they could talk.

There’s no shortage of opinions in this business. Yet thoughts and opinions are of little importance to me – it only matters what you do.

This is a results-driven game – you win or lose in the markets by your actions.

But when I encountered this opinion about the tech markets recently, I decided to take a closer look…

Now, anyone who knows me well knows I don’t read Wall Street research. It isn’t that there isn’t great info around – there absolutely is. But I know my strategy and what I do. And I don’t want to be influenced by what other folks think.

I’m also not one to tell people they are wrong or insult what they think or do. There is not a soul on this planet who is right 100% of the time. The stock market humbles everyone at some point, so I’d rather not put negative energy toward a difference of opinion.

But every now and then a headline will catch my attention. And in late October, I saw a headline that did just that…

Hedge-fund manager David Einhorn of Greenlight Capital told investors that not only are technology stocks in a bubble, but more importantly, that bubble popped on September 2.

To his credit, Einhorn did say his tech-bubble top call may be disproven. But any time I see someone mention a specific date, it catches my eye. I do relentless research on time and price in the markets.

So I wanted to dive into this call a bit more. And if you’re in doubt that tech stocks can keep going higher, you might be surprised…

The technology sector has led the way up since the March market low. The Nasdaq 100 is up more than 75%. However, within the tech sector, one specific industry is up even more… with a 100%-plus rally since the March low.

Semiconductors are the leader.

This is the most important sector in tech. Why? Well, if we look at history, it’s clear that semiconductors can tell us a lot about the direction of tech stocks as a whole.

The only time frame that’s similar to the current bubble is that of 1999 to 2000. And semiconductors led then, too. But the top was marked when semiconductors made a lower high than the Nasdaq.

This is key. Take a look at the chart below…

The semiconductor index, or the “SOX,” is labeled in [black], and the Nasdaq 100 in blue. Look what happened going into the 2000 tech-bubble top… The SOX made a lower high on March 24 (marked with green circles), while the Nasdaq 100 made a higher high (marked with blue circles).

When semiconductors stopped leading, that was the big warning. That is the price divergence that signals weakness ahead.

So what does the spread between these two indexes look like now in 2020?

It’s a little difficult to see, but note the green line. This marks a higher high in the SOX. The Nasdaq 100 made a lower high within the same time frame marked by the blue circles.

The takeaway? Semiconductors are still leading.

So unless the most regrettable words in the markets turn out to be true for once (“This time it’s different”), I do not see a long-term top in technology yet.

I first highlighted this signal to my Ten Stock Trader readers on November 2. And it has proven accurate… Both the tech sector and semiconductors are making higher highs once again. That means understanding this correlation will continue to be important from here.

This is what I think about the tech sector. And so far, it has played out as I expected, with new highs as semiconductors lead the way.

But more importantly, I plan to profit – and have with this type of analysis. Ultimately, the market will dictate who is right and wrong… but in this business, actions speak louder than words.

Good investing,

— Greg Diamond, CMT

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Source: Daily Wealth