You hear a lot today about tech stocks being in a bubble. I disagree with that statement. In fact, I’d like to give you five strong arguments as to why tech stocks could go a lot higher in price.
Let’s start off by looking at this chart, which shows the performance of five different exchange-traded funds (ETFs) since the beginning of this year. They are ETFs that track the utility sector (blue line), energy sector (pink line), industrial sector (red line), materials sector (green), and technology sector (black line).
Chart Courtesy of StockCharts.com
So far this year, tech stocks have gone up 10.92%. Utilities and energy sector stocks have done much better, increasing in price by about 15%.
Why does the performance of different sectors matter?
As investors find themselves in overheated sectors like utilities, they reduce their exposure in the long term to high-performing sectors and move funds into underperforming sectors, like the tech sector of today.
Tech Stock Outlook Bullish
Now the big question: how high could tech stocks go? Looking at it from a technical analysis point of view, you can expect major upside for tech stocks.
Please look at the chart below of Technology SPDR (ETF) (NYSEArca:XLK)—an ETF that tracks tech stocks.
Chart Courtesy of StockCharts.com
When looking at the chart above, there are three things I am paying close attention to, and they paint a very bullish outlook for tech stocks.
- Tech stocks have been trending higher for several years now. With this, you must remember the most basic rule of technical analysis: the trend is your friend, until it’s broken. You must know this as well: the 50-week and 200-week moving averages (MAs) have been acting as a trend support level for the past five years for tech stocks. For instance, in mid-2015, we saw tech stocks break below their 50-week MA, but the buyers came in at the 200-week MA.
- There’s a significant amount of bullish momentum for tech stocks. Look at the moving average convergence/divergence (MACD), the momentum indicator at the bottom of the chart. See how it’s rising? This suggests buyers are coming in and they are in control of the prices.
- There’s a clear breakout in play. Look at the blue horizontal line on the chart near the top of the chart. In July of this year, tech stocks broke above a major resistance level that had been in place for the previous 12 months.
Aside from these three technical reasons why tech stocks could rise, there are strong fundamental cases for higher tech stock prices.
First and foremost, the major tech companies like Alphabet Inc (NASDAQ:GOOGL), Facebook Inc (NASDAQ:FB), Microsoft Corporation (NASDAQ:MSFT), and Apple Inc. (NASDAQ:AAPL) are churning out record-breaking profits, quarter after quarter.
The second reason on the fundamental side is that the major tech companies are collectively sitting on hundreds of billions of dollars in hard cash that they can deploy at any time to gobble up smaller tech companies, just like Microsoft’s acquisition of LinkedIn Corp. (NYSE:LNKD).
To get some perspective on how much cash tech companies have, look at the table below.
|Amazon.com, Inc. (NASDAQ:AMZN)||$16.54 billion|
|Apple Inc. (NASDAQ:AAPL)||$62.62 billion|
|Alphabet Inc (NASDAQ:GOOGL)||$76.94 billion|
|Cisco Systems, Inc. (NASDAQ:CSCO)||$63.51 billion|
|Facebook Inc (NASDAQ:FB)||$23.29 billion|
|Microsoft Corporation (NASDAQ:MSFT)||$113.04 billion|
The six tech stocks in the table above have over $355.0 billion in cash.
Bottom line: Yes, the stock market is overpriced and very high. But the risk is more in old traditional economy stocks than in tech stocks. In fact, tech stocks have a lot more room on the upside.