Technology Sector Trading Strategy: Rules, Backtest, and Practical Example
The information technology sector has the highest weighting in the S&P 500 index, representing more than a quarter of the index’s market cap. Over the last decade, the sector has been “hot” and had a spectacular bull market.
In this article, we take a brief look at the biggest stocks in the sector, and we make a technology sector trading strategy (actually we make two technology sector trading strategies). The technology sector is a very good trading vehicle.
Let’s take a look at the sector and do some backtests.
What is the S&P technology sector?
The S&P 500 Information Technology sector consists of those companies included in the S&P 500 that are classified as members of the GICS information technology sector — a sector that covers companies that develop or distribute technological items or services, including computers, microprocessors, and operating systems.
While some companies in this sector focus on creating software or providing services related to implementing technological solutions, others are more involved in building the equipment, components, and hardware that make tech possible. So, the sector also includes makers of semiconductors and the equipment used in producing semiconductor chips.
The major ETFs that track the Information technology sector include the Vanguard Information Technology ETF (VGT) and the Technology Select Sector SPDR Fund (XLK).
What are the 5 biggest stocks in the sector?
The top 5 stocks in this sector include:
- Apple Inc. (AAPL): The tech giant manufactures and markets smartphones, personal computers, tablets, wearables, and accessories. These include the iPhone series, a line of smartphones; Mac, a line of personal computers; iPad, a line of multi-purpose tablets; AirPods Max, an over-ear wireless headphone; wearables, such as Apple Watch; and electronics — Apple TV. It also provides AppleCare support services and cloud services store services, as well as operates various platforms, including the App Store that allow customers to discover and download applications and digital content, such as books, music, video, games, and podcasts. Apple is the most valued company in the S&P 500 index, with a market cap of $2.48 trillion as of July 20, 2022.
- Microsoft Corporation (MSFT): The company develops, licenses, and supports software, services, devices, and solutions worldwide. Its offerings include Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Skype for Business, Client Access Licenses (CAL), Skype, Outlook.com, OneDrive, LinkedIn, and Dynamics 365 — a set of cloud-based and on-premises business solutions for organizations and enterprise divisions. The company also offers cloud services, including SQL, Windows Servers, Azure, Visual Studio, System Center, and GitHub, which provides a collaboration platform and code hosting service for developers. It is the second most valued company in the S&P 500 index, with a market cap of about $2 trillion as of July 2022.
- NVIDIA Corporation (NVDA): The company provides graphics and other microchips used in computing and networking solutions all over the world. Its products are used in gaming, professional visualization, data center, and automotive markets. The company sells its products to original equipment manufacturers and system builders. Its market cap is $444.847 billion as of July 2022.
- Broadcom Inc. (AVGO): The company develops and supplies various semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor-based devices and analog III-V based products worldwide. As of July 20, 2022, the stock has a market cap of $208.632 billion.
- Adobe Inc. (ADBE): The company operates as a diversified software venture, serving clients from across the world. It offers products and services that enable individuals and businesses to create, publish, and promote content. These include Document Cloud, a unified cl