Volatility in the technology sector is hitting a rare high.
Compared with the overall market, the tech sector is as volatile as it has been since 2002.
Extreme volatility is scary…
But higher volatility alone does NOT mean higher risk in the markets. It simply tells you how much a market is moving up and down.
So while tech-sector volatility is soaring… that’s not a reason to panic and sell. The tech sector actually soared the last couple of times volatility came close to these levels.
Let me explain…
Volatility in the technology sector is soaring.
The good news is that it has been upside volatility. Tech stocks are up 18% this year.
But even more important, history says today’s level of volatility could actually be a good sign for further gains…
Volatility in the technology sector skyrocketed during the dot-com bubble in the late 1990s and early 2000s.
The sector reached a volatility ratio of 3 in February 2001 – meaning the volatility in tech stocks was three times higher than the volatility in the overall market.
You know what happened next… Tech stocks fell off a cliff for the next few years. This might seem like a terrible sign. But it’s only part of the picture.
First, take a look at the chart below. It shows the volatility extreme happening right now…
Tech-stock volatility hasn’t been this high relative to the overall market since 2002. It’s more than twice that of the S&P 500 right now.
But the chart also shows that volatility has a long way to go before reaching its dot-com bubble peak. And more importantly, not every volatility peak led to a fall in stock prices.
Other than the recent breakout, this volatility ratio has risen above 2 only twice in the past 15 years… in 2004 and late 2016. Those both turned out to be good times to buy tech stocks…
The sector soared 53% from July 2004 to October 2007. And tech stocks are up 17% since the volatility spike in late 2016.
When investors think of high volatility, they tend to think about higher risk and falling prices. But high volatility just means stocks are moving around rapidly.
In the case of tech stocks, that means they can move dramatically lower… or dramatically higher.
Right now, we’re in the middle of the “Melt Up” in U.S. stocks. And that will likely mean high volatility – and much higher prices.
Tech-sector volatility is soaring. And history says that means tech stocks should continue to be a big winner.
Good investing,
Brett Eversole
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Source: Daily Wealth