It’s Time to Sit Tech On the Bench

There’s an important seasonal tendency we’re going to focus on today because it’s September 1, and that’s when one particular sector often struggles the most.

You see, September is typically one of the worst months for the Technology sector – on both an absolute and relative basis.

Let me show you what I mean.

This histogram illustrates how the Technology sector performs on a month-to-month basis, over a specified time. It acts as a batting average if you will.

And you’ll see, in September, Tech should be on the bench!

The seasonal tendency for Tech to underperform is pretty clear here.

Now let me take a minute to explain what it tells us.

The chart identifies two points:

1. The % of times the XLK (our ETF Technology proxy) has had positive returns (blue circle).

2. The historical returns (yellow circle) over the selected period of time (red arrow).

So in this example, over the previous 5 years, Technology (XLK) has had a positive return in the month of April 80% of the time – and on average XLK has had a return of 2.9% in the month of April. Not too bad!

July has been the strongest month of the year for XLK 5 years, producing positive returns in 100% of the occurrences. And those returns on average have been +5.7%. Even better than “not too bad.”

But now I’m going to curb your enthusiasm for Tech stocks for a few…

Look at September. Only 25% of the time over the previous 5 years did technology produce positive results for investors. And on average, over the previous 5 years, XLK had negative returns (-2.4%).

What happens if we increase the date range to 10 years?

Well, the results are similar, April was up 80% of the time over the last decade and July was still the strongest month of the year for tech-producing positive returns in 100% of the occurrences.

And then there’s September – still one of the weakest months to be invested in Tech over the last 10 years.

In the world of Relative Strength Investing, the cornerstone of our investment process, we want to know how Tech is holding up relative to the broader market.

Why? Because it’s possible that although Tech struggles on an absolute return basis, it’s actually strong vs. the general market… and if that’s the case it paints tech in a more positive light.

So what does Tech look like relative to the S&P 500 index? Strong or weak?

Over the previous 5 years, there has not been a single occurrence when the Tech sector has outperformed the broader S&P 500 index.

Over the last decade, Tech has outperformed the broader S&P just over 30% of the time.

Said another way, 70% of the time, in the month of September, Tech investors did not outperform the S&P 500 index.

Looks to me that seals the fate of Tech in September – weak on an absolute performance basis AND weak relative to the broader market.

So what can we conclude?

Based on historical seasonal tendencies, investors have just walked through the door to what is considered the seasonally weak period of the year for Tech.

We now know that September is “traditionally” weak for Technology.

So, we should not be surprised if the next 4-6 weeks are a struggle for Tech.

But is there any reason to believe this September is lining up to be different?

This is not 2017 or even 2021. Those were environments more conducive to growth. It was a world of low-interest rates, an accommodative Fed, with inflation under control.

I probably don’t have to remind you that 2022 looks very different.

We’re in an environment of higher inflation, rising rates, and a Fed that is pulling liquidity and is in an all-out attack on inflation, damn the cost.

Point is, all of those are major headwinds facing equity markets – particularly growth sectors like Technology.

Look, I can’t tell you with absolute certainty that Tech will struggle in September.

Is it possible that Tech has a great month, sure… anything is possible.

But is it probable? Well, that’s not a bet I’ll be willing to take.

Until next time…