Tech stocks are breaking out, defying bears and signaling year-end strength: analyst

Strength in technology stocks as U.S. equities enjoy a bounce off their October lows looks like a breakout that signals the potential for strength into year-end, a technical analyst said Thursday.

“After a 12% correction from the July highs, the bears thought tech was finally cracking but the sector has come roaring back with a 10% rally off the lows while clearing levels of key resistance,” said Kevin Dempter, analyst at Renaissance Macro Research, in a note.

The Technology Select SPDR ETF $The Technology Select Sector SPDR® Fund (XLK.US)$ is breaking out above the downtrend in what technicians call a bullish flag pattern while the relative price makes new highs, Dempter said (see chart below).

Tech stocks are breaking out, defying bears and signaling year-end strength: analyst

The sector is now overbought and may be vulnerable to some “tactical weakness,” Dempter cautioned. But the “key observation,” he said is that tech “looks poised for further upside into year-end and does not at all resemble a top.”

The tech-heavy Nasdaq Composite $Nasdaq Composite Index (.IXIC.US)$ index eked out a gain Wednesday for its ninth straight rise, while the S&P 500 $S&P 500 Index (.SPX.US)$ rose for an eighth straight day, the longest winning streaks for both indexes in two . The Dow Jones Industrial Average $Dow Jones Industrial Average (.DJI.US)$ snapped a seven-day winning streak Wednesday.

RenMac says investors should continue to focus long positions on large-cap tech shares, but look to branch out beyond the so-called Magnificient 7 group of ultralarge cap stocks that have dominated the 2023 stock-market rally.

Would-be bears have shied away from shorting the Magnificient 7, data shows. Data from a team of quantitative-equity strategists at Bank of America showed that short interest in the group, which includes seven of the eight most valuable publicly traded U.S. companies, has fallen to an record low at around 1% of the group’s aggregate market capitalization.