Semiconductors have led everything YTD, but other areas of the XLK are showing near-term improvement now as Semi’s have consolidated in over the past week.
Price Action & Performance
XLK was among the leadership cohort for the 2nd month in a row after a weak spot in March and April. Momentum made a bull market cycle high in June dispelling fears of flagging enthusiasm for the sector. The late month near-term correction has relieved an extreme overbought condition which leaves the sector on solid footing entering July.
XLK breadth measures continue to be strong as buyers responded adroitly to a broad oversold wash-out in the sector at the end of April. The sector continues to lead the market and generated the most new 52-week highs among its constituent stocks in June.
At the industry level, Semiconductors have corrected in the past two weeks, but still boast the best YTD performance of any large cap. US GICS industry. Coincident with near-term weakness in the semiconductor space, we’ve seen bullish pivots in the Software, Comm. Equipment and Hardware & Peripherals industries.
Economic and Policy Drivers
The consumer has struggled in 2024 and narratives surrounding inflation have persisted. This has made it hard to project optimistic assumptions about economically sensitive sectors, but it acts as a tailwind to Growth sectors like XLK where future earnings potential computes as more valuable when the assumed discount rate is lower. The XLK continues to benefit from the feedback loop of a weakening consumer leading to increasing discounting of a dovish Fed. policy shift in the 2nd half of 2024. Presumed economic weakness keeps interest rates restrained which benefits Growth, while discounting of dovish policy keep a level of risk seeking in the market that heretofore has benefitted the XLK as well as the XLC primarily. We aren’t seeing any obvious change in this dynamic at present. Seasonal behavioral factors don’t get statistically bearish until August. The main risk to XLK at present is the profit taking motive that surfaces at whiles when an asset has logged significant outperformance as XLK has over the past 18 months.
Advancements in AI, continued demand for cloud computing, favorable policy like the CHIPS Act and strong corporate earnings continue to set the XLK apart and benefit instruments with Mega Cap. Growth exposure.
How Can XLK Help?
We think going long XLK in July is the right call. It offers exposure to several “Mag7” components including AAPL, NVDA and MSFT. That basket of Mega-Cap. stocks has been a persistent leadership cohort since the bull market got started in 2023. The AI revolution continues to underpin Semiconductor outperformance as an essential “picks & shovels” play. Software received a bid in June and offer continued potential to bounce and would be captured by XLK exposure. The sector also historically outperforms in bull markets and is one of the few sectors that is historically interest rate agnostic so long as the equity market trend is higher. That’s the environment we are in at present.
In Conclusion
XLK outperformance has persisted as inflation was not a negative event in May or June which is starting to shift expectations of Fed. policy towards dovish outcomes. We look for the outperformance trend to continue at the sector level given the absence of material headwinds and investor recognition of long-term leadership. Our new Elev8 Sector Model debuts with XLK as an OVERWEIGHT allocation of 5.05% for July
Chart | XLK Technicals
- XLK 12-month, daily price | 200-day m.a. | Relative to S&P 500)
- XLK remains in a long-term uptrend in both absolute and relative terms
- Near-term pull-back has alleviated overbought conditions to a certain degree
Data sourced from Bloomberg
