The Business Intelligence (BI) and On-Demand Software indexes continue to outpace the broader market indexes with YTD returns of 27.8% and 35.3% respectively as of June 19. The attached chart (click on the chart to see a larger version) compares these indexes with broader market indexes along with a select set of high tech ETFs that have also outpaced.
BI & On-Demand Software Indexes versus Broader Market Indexes & High Tech ETFs (Click to enlarge)
It has been exciting to see high tech bounce off the March lows and outperform the general market but it is important to keep these gains in perspective. The higher gains have come after 2008 where these stocks also outperformed but on the downside.
Although high tech will likely outperform the market in the next bull market, especially in the early stages, but to continue this pace you have to assume the next bull market has started. These stocks will still follow the market either lower or higher. If the market takes back some (or all) of the gains from the March lows, high tech will also surrender its gains. IT budgets, like many aspects of this recession, may have bottomed but not necessarily started increasing. Companies will raise IT spending when they see evidence of the economy and their fortunes growing again.
Another word of caution. The On-Demand Software index has gained over 15% in the last month. These gains may be signs of exuberance that imply a higher beta on these stocks. With most of these companies losing money and the rest having very high P/Es their stocks are priced for perfection or acquisition.