Technology Sector (XLK) Remains Bullish


Key Talking Points:

  • Defensive stocks continue to outperform
  • Tech stocks are also on the charge
  • XLK may present traders with a bullish opportunity

Defensive Equity Sectors Continue To Outperform As Stocks Grind Higher

As we head into the end of this shortened holiday week, we’re seeing broadening selling pressures across U.S. equities. Though, it should be noted, sector performance still looks generally constructive on both a one and three month trending basis.

Industrials (XLI) -1.41% and Materials (XLB) -1.68% are worst performing sectors on the week thus far, while both the Consumer Discretionary (XLY) +0.36% and Utility (XLU) +0.14% sectors are trading slightly in positive territory.

S&P 500 Equity Sector Performance (9-9-21)

US Stock Market Forecast: Technology Sector (XLK) Remains Bullish

On a monthly basis, equity sector returns continue to align with a macroeconomic regime of marginally slower growth and historically elevated inflation. Hence the continued outperformance across defensive sectors such as Real Estate (XLRE) and Utilities (XLU) and large-cap growth via Technology (XLK) and Communications (XLC), the latter of which encompass the FAANG stocks (Facebook, Amazon, Apple, Netflix, Google).

XLK Daily Chart (Chart Reamins Constructive)

xlk daily chart

Further illustrating this is the trending outperformance of the Nasdaq 100 (QQQ) +12.96% 3M versus the Russell 2000 (IWM) -3.56% 3M at the time of writing.

Equity Index ETF Performance (9-9-21)

US Stock Market Forecast: Technology Sector (XLK) Remains Bullish

Not to mention the intermediate term inverse correlations between these sector ETFs and U.S. Treasury 10-Year Yields (TNX). Correlation is not causation, but if we believe falling treasury yields are a function of lower growth expectations, this supports the view these sectors could continue to outperform during an economic slowdown.

Equity Sector ETF / UST 10YR Yield Correlation Matrix

US Stock Market Forecast: Technology Sector (XLK) Remains Bullish

Now, risk can materialize at any moment, and/or we could see a reversal among underperforming cyclical sectors. But, if our view is that we remain in this “stagflationary” economic environment and equities drift higher, why not stick with what’s been working? Below we’ve included an examples of a defined risk/reward options strategy that may be worth considering, should this play out

Trade Set-up XLK Vertical Call Spread

Buying a vertical call spread in the Technology sector ETF XLK is a potential way to express a short-term bullish view on the sector.

The following example illustrates buying the 158 strike call option in the September (9/17) monthly expiration and selling the 160 strike call option in the same September (9/17) expiration period to create a bullish call spread. At the time of writing, this spread is trading for roughly $1.00, which gives the spread a risk/reward ratio of 1 to 1.

Assuming this trade is filled at a cost of $1.00, its maximum potential profit is $100, should the price of the XLK be above $160 per share on the trade’s expiration date of 9/17. If the price of XLK is below $158 per share at expiration, the spread has a maximum potential risk of $100. The underlying break-even price for this spread is $159 per share and can also be traded out of at any point leading up to expiration.

*It should be noted that this is a short-term trade with only 8 days until expiration. Additionally, there is added exercise/assignment risk, if the price of XLK is between $158 and $160 and the trade is not closed prior to the end of trading on the expiration date of 9/17.

XLK Vertical Call Spread Risk Profile

US Stock Market Forecast: Technology Sector (XLK) Remains Bullish

Source: tastyworks Desktop Trading Platform

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