The end of last week was ugly, there’s no sugar coating that. How does technology look after the recent pullback?
The end of last week was ugly, there’s no sugar coating that. The S&P 500 was down 2.25% over Thursday and Friday, with growth and technology stocks taking the brunt of the damage. The Nasdaq-100 fell 4.8%, while the Technology Select Sector SPDR Fund (XLK) dropped a whopping 6.7%, leaving the sector within one percent of entering correction territory. Semiconductor stocks were hit the hardest, as the VanEck Semiconductor ETF (SMH) dropped almost 10%, marking its 10th worst day ever and its biggest one-day decline since January 2025. Suffice to say, it wasn’t good.
When faced with quick pullbacks like these, it’s important to remember the full context of the group’s strength and not let emotion creep into decision-making. NDX and XLK are still up 22% and 35.7% since the end of March, respectively. Domestic equities sit closely behind international equities at the top of DALI, while technology firmly holds first place in DALI’s sector rankings. Tech was previously in historically overbought territory, so the recent pullback could serve as a healthy exhale as the sector consolidates back toward normal levels. After last week’s action, NDX, XLK, and SMH are no longer heavily overbought, trading in actionable territory for the first time since April. Even if technology moves back into a bear market, declining 20% from all-time highs, XLK would return to levels last reached on April 28, erasing just a month and a half of gains.
Prior to this pullback, there had been an encouraging increase in breadth in the sector, serving as another positive sign for the group. There’s an adage that says, “A rising tide lifts all boats.” Over the last several months, technology has lifted the market higher as one of the highest relative strength areas. And yet, the rising tide in technology did not lift all boats, with upside coming almost exclusively from semiconductor stocks. Even over the last few years, mega-cap technology stocks have led the market higher, as opposed to broad-based gains across the sector. However, action over the last month has shown technology broadening out, even amid the recent pullback.
The market and technology bottomed out at the end of March but immediately rebounded in April, with XLK rising 20% during the month. However, Semiconductor fund SMH gained 32% in April, whereas the iShares North American Tech-Software ETF (IGV) rose less than 5%, highlighting just how narrow the upside was.. The major driver of the divergence between semiconductors and software stocks was the impact of AI on their businesses. As AI models continued to advance and develop, demand for semiconductors and memory chips was expected to grow. On the other hand, investors began to fear that AI models could replace portions of the software industry, as LLMs might eventually provide similar functionality. However, narratives within the technology space have shifted in recent months, with investors increasingly recognizing that the underperformance in software may have been overdone.
Tech has looked much more balanced since the end of April, with IGV outperforming SMH, rising 14.2% and 12.4%, respectively. Additionally, the relative strength of both groups appears much closer. SMH has held a fund score above 5.0 for almost a whole year, but IGV’s fund score fell as low as 0.18 in April. Since then, IGV has improved dramatically, raising its score up to a solid 4.16, marking an extreme turnaround for the subgroup. Within software, cybersecurity has seen arguably the largest rebound of about any subgroup—not just within technology. The First Trust NASDAQ Cybersecurity ETF (CIBR) has gained around 45% from its lows, returning to a positive trend before hitting all-time highs once again.
With upside within technology coming from more than just semiconductors, the percentage of technology companies trading in a positive trend (^PTECTECH) has risen up to a respectable 44%, up from 26% in March. For context, the PT is now just one box away from matching its highest level since the start of this bull market in 2022, underscoring the group’s quietly strong participation. While the sector could continue moving lower in the coming weeks, its broad-based strength has been an extremely encouraging development for its long-term health, especially as it continues to hold first place within our relative strength rankings.
