Trading Nation

Here’s why surging tech stocks might be badly overbought

Trading Nation: Can the tech sector keep leading the market?
Trading Nation: Can the tech sector keep leading the market?

The technology sector is the best-performing sector in the S&P 500 this year, rising nearly 9 percent, but it may begin showing signs of weakness in the short term as several heavyweight stocks disproportionately lead the pack, some strategists say.

The top-weighted stocks in the XLK, a popular exchange-traded fund that tracks the performance of the tech sector, are Apple, Microsoft, Facebook and AT&T; together, they account for 37 percent of the 72-constitutent fund. Apple, Facebook and Amazon have had the most positive point impact to the overall market this year.

"It's definitely top heavy. I'm of two minds of tech," Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management, said Thursday on CNBC's "Power Lunch." "Secularly, I'm a huge bull because I think tech is eating the world. Every single dollar we're spending is on tech. So long term, it's still a very strong buy. Short term, though, it's so overbought at this point, that I think there's definitely going to be some mean reversion."

In other words, Schlossberg thinks there's going to be some shorter-term weakness in the sector, so he marks tech a "short-term sell" at current levels.

The technology sector on Thursday hit its highest level since September 2000 and has closed positive every trading day this month. That's the sector's first 12-day winning streak since July 2009.

In breaking open the XLK, "there's a big dispersion in terms of how different stocks are performing. If you look at Apple, Microsoft and the FANG stocks [Facebook, Amazon, Netflix and Google parent company Alphabet], just take those six stocks, they're upwards over 12 percent year to date return," Gina Sanchez, CEO of Chantico Global, said Thursday on CNBC's "Power Lunch."

"But if you look at the rest of the XLK, it is literally around 5 percent."

So at current levels, Sanchez said, she would make the argument that FANG stocks are overvalued, and she's cautious at the prospect of the tech run continuing, simply because of the appearance of its leaders being overvalued.

Technology is indeed overbought, Rhino Trading Partners' chief strategist Michael Block wrote in a note published Thursday, "but strong earnings mean that it could get more overbought and we will seek opportunities to short in semis and equipment."

Looking ahead, protectionist trade policy under President Donald Trump's administration would prove largely negative for most U.S. tech companies given the large number of products manufactured overseas, Goldman Sachs' technology, media and telecommunications team wrote in a note this week.

While political uncertainty looms over the sector for this reason, the team wrote that a lower domestic corporate tax would prove to be a positive for several subsectors within the TMT space — particularly telecom, cable and information technology services and payments.