Why Tech’s Your Best Bet in This Market
We’re in unprecedented market conditions.
For the first time in history, world leaders have essentially ground the global economy to a halt to curb the spread of a global pandemic.
And that’s spurred the fastest sell-off in market history — a quicker plunge than we experienced in 2008 or even the brutal crash of 1929.
But despite all of the uncertainty, one thing’s become clear: Tech stocks are your best bet in this market.
Fact is, when times get tough, it becomes even more important to “own what’s working.”
In bull markets, that means owning the stocks that are outperforming the market. And in bear markets, that sometimes means owning the stocks that are “less bad” than a falling stock market.
Why would you want to buy stocks that have been faring better than the pack? Research shows that these names lead to continued outperformance.
A bevy of studies by academics and practitioners has shown that stocks with high returns over a three–12-month time horizon generate excess profits over the course of the following year.
Put simply, outperformance persists.
And tech stocks are outperforming in a big way right now…
The chart below is a Relative Rotation Graph of the major indexes in the S&P 500:
It looks complicated and busy, but it’s pretty simple.
In a nutshell, it shows you the relative strength for a group of stocks. It can show you which sectors are leading and which are underperforming — and it lets you visualize how those assets are rotating in and out of favor.
Basically, the bottom-left corner is the stuff you don’t want. Energy and financial sector stocks lead that do-not-buy list right now. And the upper-right corner of the chart is the stuff that is working — those are the sectors you do want to own.
Furthest right is the tech sector.
That means it’s the most leading corner of the market right now.
And that also means it’s likely to continue to be a source of outperformance in the months ahead.
Within tech, a few of the strongest and biggest names have been Nvidia (NASDAQ: NVDA), Amazon.com (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT). All of those stocks are actually up so far in 2020.
And they each offer some downside protection if the economic impact of COVID-19 persists longer than analysts are currently forecasting.
Owning a basket of leaders is a data-backed way to outperform the rout in 2020.
Jonas Elmerraji, CMT