Tech Stocks: Rebounding and Expanding

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

Expanding Winners' Circle

At the start of 2023, the rally faced skepticism due to its reliance on a small handful of Big Tech winners, notably 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 expanded, a trend that has continued after tech's brief selloff in August. The sector's latest rebound has been driven by broad-based gains, with a majority of tech stocks advancing from their August lows, rather than just a few heavyweights.

Promising Signs for Tech Returns

Analysts at market analysis firm SentimenTrader believe that this breadth demonstrates positive prospects for ongoing tech returns. Historical data reveals that sharp tech rallies propelled by various sector stocks often foreshadow medium- and long-term gains.

According to SentimenTrader, more than two-thirds of tech stocks have rebounded from their recent selloff within a mere 10 days. Over the past five years, such a rapid sentiment reversal has only occurred twice after a similar timeframe without momentum—a technical indicator. In October 2022 and February 2018, both instances preceded sustained gains, particularly over the following three- and six-month periods.

Tech Stocks Show Strong Performance

In recent years, tech stocks have experienced impressive gains within relatively short time frames. For instance, in 2018, these stocks saw a swift 10-day climb, followed by three-month and six-month gains of 3.6% and 9.2% respectively. In 2022, the upward trend continued, with tech stocks rising 5.5% over the next three months and a remarkable 16.5% over the following six months.

This pattern of rapid growth has a long history dating back to 1952. According to experts, when tech stocks experience this kind of climb, there is an 82% chance that the sector will continue to perform well over the next six months. Additionally, the median return during such periods is a notable 14.3%.

While some investors may be concerned about tech stocks being at near multi-year highs, there is evidence to suggest that further gains are likely. Market analysts from SentimenTrader conducted a study that examined seven instances where tech stocks had a swift and broad-based surge. They found that on only one occasion, in 1980, did this surge lead to a significant decline. However, after enduring double-digit losses during that episode, tech stocks then embarked on a remarkable bull run.

Overall, history indicates that these recent gains in the tech sector are not an anomaly. It seems that investors don't require much persuasion to invest in this segment of the market. Despite potential apprehensions stemming from the volatility of 2022, the data suggests that the current upward trajectory is sustainable.