TECH IS OVERBOUGHT RELATIVE TO THE MARKET
TECH, measured by the ETF XLK, is overbought relative to the market (SPY). The ratio XLK/SPY has a 14-day RSI of 80. The RSI for XLK/SPY has vacillated between 70 and 80 for most of 2019. Chart 1 below shows the ratio of XLK/SPY for 2017-2020. The ratio has hit RSI 80 three other times; May 2017, OCT-NOV 2018 and MAR-APR 2019. Each of these periods was followed by underperformance of XLK versus SPY. Chart 2 show that the underperformance of XLK versus SPY (decline of XLK/SPY) was a little over 4.5%. Once this period of underperformance was finished, however, TECH began to outperform the market again.
Tables for the top holdings of XLK and SPY are provided below. Clients will recognize that many of the top holdings on SPY are also TECH companies. It is the overweighting of TECH that may cause problems for XLK at this juncture. TPA’s message to clients is that this is not a high conviction entry point for TECH relative to the market and clients should show caution when entering into or adding to TECH positions versus those of other sectors.
RATIO XLK/SPY – 2017-2020