XLK Should Rally Hard Into Year-End, But Not Just Yet (NYSEARCA:XLK)

Technology stocks very much drove the rally in 2024 that ended rather abruptly this summer. Given they’re the largest component of the S&P 500, but also that many of them saw meteoric rises into July, The Technology Select Sector SPDR® Fund ETF (NYSEARCA:XLK) was a strong performer to say the least.

I last covered XLK back in April, when I slapped a buy rating on it at ~$208 per share. The ETF fell to about $200 in the days after the article, but then made a run to $237 before topping over the summer. The ETF contains the mega-cap names we’re all used to leading the bull market we’re in, and that served it very well into the top. Those same names have been pretty awful since, however, and in this article, we’ll take a look at whether it’s time to buy tech again or not.

Mega-caps everywhere

We’ll start with a refresher on what XLK is, and that’s a very concentrated bet on mega-cap tech names. Microsoft makes up almost 22% of the fund, while NVIDIA is a further 19%, meaning that just two names are over two-fifths of the fund. There’s a smattering of other big tech companies that are 5% or below, but the XLK right now really is about Microsoft and NVIDIA.

We can see the semiconductors make up a big part of XLK, for obvious reasons, with NVIDIA, Broadcom, and AMD in the mix in the top 10. This, then, is an aggressive ETF for investors that think tech is going to outperform the S&P 500. Such a thing has a time and a place, such as when I was bullish back in April. However, right now, I don’t share that same sentiment despite the fund being about the same price as it was back then.

Let’s take a look first at the top two names, Microsoft and NVIDIA, which are more than 40% of the fund.

Both are in clear downtrends, particularly Microsoft, which cannot seem to catch a bid. NVIDIA is in a downtrend as well, so neither look particularly inspiring if you’re a bull. When 40% of a fund has charts that look like this, it’s very difficult to want to own it until the charts improve.

Speaking of charts, let’s take a look at XLK’s price chart to get an idea of what we’re dealing with from a technical perspective.

We can see the XLK put in a top in July and then fell in a straight line from $238 to $190 in the space of a few weeks. The bounce out of the August 5^th low was unreal in terms of speed and magnitude but XLK quickly gave way to another wave of sharp selling. Today, we have a fund that is showing pretty awful momentum, below the major moving averages, as well as key price support/resistance.

With the PPO under the centerline and declining, as well as the RSI never cresting the 60 level since the July peak, momentum is firmly in favor of the bears. The nail in the coffin for the bulls, at least until it changes, is the fact that XLK is below the $211 level, which was the top until the breakout in May. That’s a critical price level and so long as XLK is below it, I’ll remain bearish. I see no signs at the moment that suggest we’re about to see a move through there. Maybe it happens, and if it does I’m happy to change my stance, but I believe we’re going to see lower lows before we get a significant bullish move.

How bad is it for XLK? This chart shows XLK’s performance relative to the S&P 500 for the past 10 months, and we can see that since the top in July, XLK is more than 10% worse than the S&P 500.

Of course, this kind of thing happens in the fall, generally speaking, as XLK’s seasonality is just awful in September.

The stock market in general is weak in September, but XLK is really weak, with it being the only month of the year where XLK’s median returns are negative. The really good news is that October and November are tremendous, and I fully expect XLK to rally hard into the end of the year. But I don’t want to take that chance right now as I think there’s still meaningful weakness ahead before we get that year-end rally.

So what do we do then?

The bottom line on XLK is that I think we see a test of $190 in the best case scenario, and something lower than that at worst. Either way, before I get involved in tech again, I want to see that weakness play out.

I believe we see that low (whether it’s $190 or something lower), then very quick and sustained buying to the winter months. XLK will be an excellent way to take advantage of that rally, but it’s too soon to buy right now.

When will it be time? I need to see Microsoft and NVIDIA form sustainable bottoms, but neither are close to doing that just yet. When those charts turn bullish, that’s when you want XLK. I think we see at least $385 on Microsoft before a bottom is formed, and at least $90 on NVIDIA. We’ll know in the next few weeks where the bottom ultimately ends up, I believe, but we’re not there yet. Patience, I believe, will pay off handsomely with big tech as 2024 wraps up.