Overbought tech may still party on

Another day, another record intraday high for the Nasdaq and the Technology Select Sector SPDR Fund ETF (XLK). U.S. tech stocks may be overbought on a 14-day RSI basis but that doesn't mean the party is over if the days of falling volatility are back.

There are instances in which the tech ETF was able to rally after an overbought RSI, i.e. a reading over 70. During a period in October and November 2017 when the RSI hit 84, the XLK managed to rise 1.4% in November even with a decline at the start of the month. A 6% gain followed an overbought RSI that concluded in mid-May.

The XLK's overbought RSI in January did come right before the market implosion. But the short-vol trade has faded and, as Andrew Cinko points out, a lower put-call volume ratio suggest a lack of fear amid falling volatility and record Nasdaq highs. While tech may take a break soon, further records may be on the horizon.

One common way to use the Relative Strength Index is to short the overbought security when the RSI falls back below 70 from an overbought reading, though that happens to be the worst-performing strategy for the XLK this year based on Bloomberg's back-testing function.

Source: Bloomberg Pro Terminal

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