The most well-known technology index is the NASDAQ Composite in the United States. In February, it was tracking at about 9700 points before plunging to less than 7000 in March.
By early September, however, it was hitting record highs above 12,000.
In Australia, we now have our own local technology index.
The S&P/ASX All Technology Index was launched on February 24, just a few days after our broader market hit a record high.
The index features 58 of Australia’s leading and emerging technology companies across a range of sectors and industries, including healthcare and online marketplaces.
Listed under the ticker XTX on the Australian Securities Exchange, the index has followed a similar path to the NASDAQ this year and has added $33 billion in value in three months.
The XTX has doubled from its March lows and is now tracking at levels higher than when our broader market peaked in February. From its low in March, it has doubled.
There are a number of reasons that can explain why technology share prices are booming.
In a low-growth world, investors are prepared to pay a premium for companies that have plenty of growth ahead of them.
Sure, some may not be making money today, but the larger these companies become and the more market share they can capture, the greater earnings potential they have down the track.
Low interest rates are also affecting valuations and pushing the tide higher for all stocks in the market.
Undoubtedly, though, there is a bit of “fear of missing out” going on. Not only that, but there are fewer places for investors to park their money if they are seeking a good return.
All of this, of course, leaves the market more prone to corrections along the way.
Shares in technology companies globally experienced a sharp cooling off last month.
The big question now is whether there is more downside ahead, or were markets just letting off a bit of steam?
The catalysts that caused the recent technology rally look likely to remain with us a bit longer and technical analysis shows the sector could again move higher.
Looking at the charts for the XTX, the NASDAQ Composite and some of the big technology companies, in some respects, they all look similar. In my opinion, they are all still in solid uptrends.
Whenever a market declines by at least several per cent, there are always those who believe the dip is the start of a new bear market. But the charts do not show that at all.
The decline in September resulted in sharp movements lower on only a few of the days, and the overall decline has looked fairly orderly.
Technology stocks, in general, ran a bit too hard at the end of August, so the recent declines only brought them back to where they were several weeks ago.
I think what we are witnessing is a mere correction against a large, long-term uptrend. This means there is a good chance that the climb in the XTX – and technology stocks in general – should have further to run.
Michael Gable is managing director of Fairmont Equities.