Technical Analysis | The rise of US technology stocks is not over yet

People have been skeptical about the rebound of technology stocks in early 2023, mainly because it relies only on a few tech giants, namely Tesla, Nvidia, Meta, Apple, Microsoft, Alphabet, and Amazon.

However, over time, the circle of winners has expanded, and this pattern reemerged after a brief sell-off in tech stocks in August. The recent rebound of tech stocks is built on a broad-based rally, with most tech stocks rising from the lows of August, not just a few tech giants.

Expanding Market Breadth

Analysts at Sentimenttrader, a market analysis company, suggest that this breadth indicates sustained returns for tech stocks. Historical data shows that tech stocks driven by multiple industries often indicate medium to long-term gains.

Over two-thirds of tech stocks rebounded from the sell-off in just 10 days. Such a rapid reversal of market sentiment has only occurred twice in the past five years, and the industry had not seen a similar rebound for over six months - a technical indicator of measuring market momentum.

In October 2022 and February 2018, both signals indicated sustained gains, especially in the following three and six months.

In 2018, after a rapid 10-day rise in tech stocks, the three-month and six-month gains were 3.6% and 9.2%, respectively. In 2022, tech stocks rose by 5.5% and 16.5% in the following three and six months.

Looking back to 1952, under this pattern, the industry had an 82% probability of positive returns in the next six months, with an average return of 14.3%, "far higher than random returns."

Lessons from History: Tech Stocks Will Continue to Rise

Of course, some investors may still feel nervous as tech stocks approach multi-year highs, and the rapid rise in this sector may foreshadow a crash.

However, Sentimenttrader also points out that historically, tech stocks have had more room to rise.

The company studied seven instances when the S&P 500 Information Technology sector rose above the 200-day moving average, and tech stocks generally rallied quickly, staying within 5% of the previous three-year high.

Sentimenttrader found that there was only one major crash in 1980. After experiencing that double-digit loss, tech stocks subsequently entered "one of the biggest bull markets in history."

Overall, investors don't need much persuasion to buy tech stocks this year. But for those concerned about a rapid rebound in the industry following the sell-off in 2022, history provides some evidence that the recent gains have not brought false hope.