Executive Edge

History of tech stocks shows the big market drop investors feared is not likely

Why you can expect the bullish trend for tech to continue into 2020
Why you can expect the bullish trend for tech to continue into 2020
Key Points
  • When technology stocks gain 3.5% or more in a trading week, the bullish trend continues a month later.
  • The huge market plummet in December 2018 made many investors fearful, but the stock market is setting new records, and the tech-led run could continue, based on recent market history.

The Technology Select Sector ETF, the XLK, is up over 3.5% in the past week. The rally in technology stocks earned the sector another record high on Monday, and history suggests the winning streak will continue through the end of the year.

Coming into December, many investors were fearful about a big market drop, a repeat of December 2018 when stocks plummeted. Optimism about the trade deal with China, as well as the House-approved deal with Canada and Mexico, have buoyed confidence. Tech stocks are another reason to remain positive on the market.

Tech already is the best-performing S&P 500 sector this year, surging about 45%. After a week in which it gains 3.5% or more, the XLK continues higher over the next month, according to a CNBC analysis of Kensho, a hedge fund analytics tool. The XLK averages a gain of another 2% and trades positively 69% of the time across 35 instances when this trading scenario has occurred in the past five years. The tech sector continues to outperform the broader market in these month-long trading windows.

Stocks rose for a fourth straight day on Monday, led by shares in semiconductor stocks Micron Technology and Western Digital.

"This has been the thing that, personally, I've been looking for all year," Kim Forrest, founder of Bokeh Capital, told CNBC about the U.S. China trade deal on Monday. "Increased trade is going to allow companies to start spending again on capital expenditures. That had been frozen, and most of those are technology purchases."

But the jitters are still out there.

Jeff Saut, chief investment strategist at Capital Wealth Planning, recently told CNBC's "Trading Nation" that even with the stock market setting new records, investors are "scared to death" of what may come in the new year.

He said that even if there is a drop, it is not an issue that investors should fixate on.

"Secular bull markets tend to run 15 to 20 years. They're not interrupted by 20% to 30% declines," said Saut on CNBC's "Trading Nation" on Friday. "We've got years left on the upside."