Investing in Technology stocks for the rest of 2021

By Tomasz Wisniewski, Director of Research and Education

Evergrande. You’ve probably heard the name already. Some say it’s the black swan that many have been waiting for.  We are about to find out about that, but what is certain is that Evergrande has problems as we speak, and those problems have at least started a proper bearish correction. In cases of a black swan, the correction will extend to a proper recession, but for now, it’s still just a correction.

The real question is, at a time when almost everyone is dumping stocks, is it wise to enter the market? Some may say yes because they’ve heard someone say you should buy when there is “blood on the streets”. That may be true, but currently, it’s just a scratch that’s still far from a real bloodbath.

So, is it time to use the lower prices to buy stocks? In my opinion no. Is it a time to buy technology stocks? Well, still no,  but I say that less confidently.

Two main reasons why technology stocks may perform better than the others:

First is the history we’ve experienced from the Corona crash. Technology stocks were the real winners of that crash. They outperformed the rest of the market. Yes, I know, it was specific, we all moved from traditional operations to digital ones. It helped for sure but also it was not the only reason why technology stocks performed better. They performed better, simply because they’re the future! Demand for them is pretty stable regardless of the global situation. That’s not the case with, for example, energy companies, banks, retailers, etc.

Another thing is the overall technical situation of technology stocks and the tech heave index like Nasdaq. We are much higher there. Major supports have not been broken yet and the long-term up trendlines remain intact. Traders prefer to abandon other sectors, those which in case of the contagion will slow down. Technology stocks are not in this category that’s why it’s not necessary to abandon them in a panic like we now see happening elsewhere.

So what it’s the outlook for technology stocks for the rest of 2021?

It’s negative. Not as negative as other sectors, but still negative. And it’s not because a big recession is coming ‘for sure’. We don’t know this to be true, and it’s not really the case.

Evergrande, for now, has given a signal to a correction. One look at the indices and you can see that there doesn’t have to be a recession to see significant drops. Markets were so overbought that even a normal bearish correction has a lot of room to develop.

Corrections are normal and healthy. Traders are cashing out, capturing profits. The prices drop and become attractive to re-enter the market again. Normal market cycle.

When will they be attractive to buy?

Here’s when you follow price action rules. You wait for the price to show you a good level! As long as the price is falling on heavy volume, smart money is dumping this stock. When you see a reversal on heavy volume, it’ll mean that smart money bought, taking this price to be very attractive. In trading, you want to follow the smart money, not fight with it or, even worse, try guessing or feeling, by using your limited resources and very often biased false assumptions.