Tech stocks are nowhere near the top, this chartist says

What’s in store for North America’s tech sector over the next 12 months? Depending on who you ask, the similarities cropping up between today’s market activity and the dot-com bubble are either a sign of trouble on the horizon or an indication that tech is about to break through to new highs.

Taking up the more optimistic stance, J.C. Parets, technical analyst at AllStarCharts.com, who says that tech still has 35 to 40 per cent more room to grow.

Tech stocks took a downturn over the first half of 2018, with a major selloff between February and May blamed on concerns over impending regulation within the industry. The pullback impacted tech giants like Google, Facebook and Amazon, who all saw their meteoric growth over recent years stopped in its tracks.

Yet those losses have almost all been since erased, leaving investors wondering whether the sector is ready to get even bigger. That’s more than likely, says Parets, who insists that now’s the time to be bullish on tech.

“The thesis is that we’re starting a new leg higher,” Parets told BNN Bloomberg Monday. “It’s nothing new, we’ve been watching it happen over the past six to 12 months.”

Parets points to the Exchange Traded Fund the XLK (the Technology Select Sector SPDR Fund), which tracks an index of S&P 500 technology stocks. Parets argues that only recently has it broken through highs established back in March of 2000, meaning that it has taken the better part of two decades to correct the tech bubble of the dot-com era.

“We absolutely went nowhere for 13, 14, 15 years in tech. Zero outperformance,” Parets says. “And then over the last year-and-a-half or so, we’ve started to see that beginning of the outperformance. We’re getting relative strength, we’re getting positive momentum and we’re just now breaking out above the March 2000 highs. If we are above those highs, it’s really hard to make a bear case.”

Importantly, Parets says that unlike the tech bubble, the current trend won’t involve a crash —in fact, the selloff earlier this year effectively represents that corresponding pullback.

“We broke out about those 2000 highs last year and the correction that we saw in the first quarter of this year essentially went back to retest that breakout,” says Parets. “That selloff took place, which was a perfectly normal, retesting of that former high and is now making new highs.”

“If we are above those former highs, we have to err on the long side, there’s absolutely no question,” says Parets. “I think we go a lot higher. I think we have another 35-40 per cent higher in technology.”

Not everyone is convinced, however, as the concentration of investment in the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix and Google, with Microsoft often thrown into the bunch, as well) is looked at as an indication of trouble ahead.

“You could argue the contemporary fascination with technology stocks has just completed an entire dotcom cycle,” says Jim Paulsen, chief investment strategist at the Leuthold Group, wrote in a note to clients. “That is, for five years, tech has dominated the S&P marketplace which is surprisingly close to how long tech dominated during the dotcom run in the 1990s.”

“I just wonder if it might end similarly,” says Paulsen to CNBC. “Not to the same magnitude, but similarly.”

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