Trouble for Technology?
Key Takeaways
- Technology is losing momentum and strength.
- Semiconductors were the key driver within Technology, but $SOX is rotating out of favor.
- Money is rotating into other sectors, such as Health Care and Financials.
- The S&P 500 faces challenges in maintaining current levels without participation from technology and semiconductor sectors.
Technology Sector at a Crossroads
This week, all eyes are on the Technology sector.
A look at the weekly Relative Rotation Graph (RRG) for U.S. sectors continues to show a highly unusual scenario: Technology is the only sector inside the leading quadrant and the only one on the right-hand side of the graph. In other words, it’s the sole sector in a relative uptrend versus the S&P 500 (SPY), while all other sectors are trending down. This is due to the massive weight Technology holds in the S&P 500, which drives this dispersion.
Relative Momentum Is Fading
Recently, the technology index began to lose relative momentum. As of this week, it’s also starting to lose relative strength, moving lower on the RS-ratio scale, causing a negative heading between 180 and 270 degrees on the RRG. When plotted beneath the price chart of XLK, both RRG lines are now moving lower.
Meanwhile, most other sectors are doing the opposite. They’re picking up relative momentum, with some, like Health Care and Financials, even gaining relative strength and moving into the improving quadrant. Still, Technology remains the focal point, given its outsized influence on the S&P 500’s overall level.
Breaking Down the Technology Sector
A closer look at the Technology sector’s industries paints a more nuanced picture. On the weekly RRG, semiconductors ($DJUSSC) stand out as the main group driving the sector’s performance. With the heaviest weighting inside technology, semiconductors have been the primary force behind the market’s upward movement.
However, other groups are starting to turn around and gain relative strength. The Telecommunication Equipment Index, for example, has reversed course and is now moving higher on the RS-momentum scale, heading back toward the leading quadrant. Computer Hardware (DJUSCR) is also nearing a return to the leading quadrant after rotating through lagging and improving phases. Renewable Energy Equipment is making notable progress on the RS-ratio scale, though its classification within technology is debatable.
On the other hand, Computer Services and Computer Software are still low on the RS-ratio scale, though they’re pushing into the improving quadrant.
The key takeaway is that semiconductors remain the pivotal group within technology.
Technology, Mag 7, and Semiconductors
A customized RRG comparing XLK (technology sector), MAGS (the Mag 7 ETF), and $SOX (the semiconductor index), with SPY as the benchmark, reveals several important trends.
- MAGS (Mag 7): Rotating downward into the lagging quadrant without ever reaching the leading quadrant. A negative sign, given these seven stocks represent a significant portion of the S&P 500’s market cap.
- XLP (Technology Sector): Rolling over, losing both relative momentum and relative strength.
- $SOX (Semiconductors): Still in the leading quadrant but rapidly heading lower on both the RS-momentum and RS-ratio scales.
These three groups, which overlap significantly within the S&P 500, are all showing negative rotation.
Will Other Sectors Pick Up the Slack?
As money rotates out of technology/semis and into other sectors, the big question is whether these inflows will be enough to push those sectors into a relative uptrend and, consequently, keep the S&P 500 at current levels or higher.
A Closer Look At the Individual Charts
XLK
Switching to daily charts for a more immediate perspective, the technology index is breaking down from a large symmetrical triangle, typically a weak sign. Based on that triangle, the downside target now sits between 150 and 155, aligning with support zones from previous peaks in late 2020, late 2025, and earlier this year. There’s minor support around 170 but, if that fails, the path to 150–155 opens up.
MAGS
The daily chart for MAGS isn’t as negative as XLK, but a two-bar island reversal has formed, setting resistance around 68 and support near 64.60. This pattern doesn’t suggest a strong outlook for MAGS.
$SOX
The Semiconductor Index ($SOX) is showing a solid head-and-shoulders reversal pattern spanning nearly two months. The neckline, around 12,000, was broken and now acts as heavy resistance. The downside target is just below 9,500, with real support only around 8,500, the top of the range from February and March this year.
Can the S&P 500 Hold Without Tech?
There’s a clear rotation underway in the US market, going out of Technology, semiconductors, and the Mag 7 and heading into other sectors. The critical question is whether this rotation will be strong enough to keep the S&P 500 at current levels or push it higher. Given the sheer market capitalization of the Technology sector, and of semis within it, it will be difficult for the S&P 500 to rise, or even hold steady, without their participation. Also, four out of the Magnificent Seven stocks are not in the Technology sector. This points to a broader rotation out of large- and mega-cap (growth) stocks; another drag for the S&P 500.
#StayAlert and have a great weekend, -Julius
