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Is the Technology Run Slowing Down?

The month of August has put a pause to the rally that the markets have experienced so far in 2023, particularly for larger technology stocks. Is this a digestion of the large gains seen this year in the sector? Or is market strength beginning to rotate?

For the most part, technology-related stocks have been by far the best performers in 2023. As Ned Davis Research writes in their August 11th update:

“The technology sector’s year-to-date performance through July was its second-best start to a year since our sector data begins since 1972. Relative to the S&P 500, [the sector’s] outperformance was the sector’s best to begin a year on record.”

The last two weeks have brought the sector’s relative strength to a slowdown. Large technology stocks like Apple, Microsoft, and Nvidia (which collectively make up 16% of the S&P 500’s capitalization) have each declined by -9% or more from their respective peak levels over the past month, after experiencing substantial rallies this year.

Investor Sentiment

These declines have sparked a growing concern among investors, or at least reduced the high levels of optimism we saw last month. Ned Davis Research also points out:

“The pullback of the big tech stocks has [resulted in a] quick decline in investor sentiment. The Hubert Nasdaq Sentiment Composite has fallen out of its extreme optimism zone and is at its lowest reading since mid-March.”

Investor sentiment is generally considered a contrarian indicator, meaning that high levels of optimism often precede pullbacks, whereas high levels of pessimism precede rallies. We wrote about another sentiment indicator, the AAII Investor Sentiment Survey, last month. According to the survey, in mid-July, more than 50% of survey participants were bullish on the markets (the highest level since April 2021). Now, as of last week’s survey results, that number sits at 44%, which is still above historical averages.

Market Rotations

As for the idea of a market rotation, most of the recent weakness seen in technology-related stocks is coming from the Information Technology sector, particularly in its largest components (the formerly mentioned stocks). That being said, sectors like Information Technology, Communications, and Consumer Discretionary are still highly ranked according to Canterbury’s risk-adjusted rankings.

One area where there has been some market rotation in strength is with the Energy sector. Just one month ago, Energy was ranked as the second worst S&P 500 sector (out of eleven sectors). Now, it has moved up to being the fourth highest ranked sector, just below the three technology-heavy sectors. Energy is now exhibiting some more positive technical aspects, such as trending above some key moving averages and breaking out of its pattern of lower highs.

Bottom Line

Pullbacks are a normal part of markets. Technology stocks have seen huge, historical advances this year, after experiencing significant declines in 2022. To put one technology-related stock into perspective, Amazon being up nearly 60% in 2023 is only significant when you ignore the fact that it was down -50% in 2022. A 60% rally off of a -50% decline is nowhere near breakeven.

That being said, technology stocks are still leading the markets. Declines in some of the heavy hitters like Apple and Microsoft are a cause for some concern. Markets are in a vulnerable position when just a few sectors have carried it, and then start to experience suboptimal characteristics. This could all be a part of a normal pullback, but that remains to be seen.

Energy stocks have gained some momentum over the past month and the sector is one of the few that does not exhibit too much correlation to the overall market. That is one of the few areas where there has been a clear rotation in relative strength.

As a final note, the number of consecutive trading days without an outlier (a trading day beyond +/-1.50%) is now up to 67. I will say that is a surprise given the volatility seen in some technology stocks in the last two weeks. I wouldn’t expect that streak to continue to grow if those large technology stocks continue to be volatile, or other market sectors start to follow suit.


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