October 27, 2015
Tech Sector Suggests Near-Term Strength in the Market
By John Kosar
All major U.S. indices closed higher last week to log their fourth straight week of overall strength. The rally was led by the tech-heavy Nasdaq 100, which gained 4.2% and is now up an impressive 9.2% for the year, compared to the modest 0.8% year-to-date rise in the broader market S&P 500.
Bringing up the rear last week was the small-cap Russell 2000, which, along with technology, typically leads U.S. market rallies, so I would ideally like to see some emerging strength in this index to help sustain a fourth-quarter advance.
Most sectors of the S&P 500 also finished in positive territory last week, led by -- you guessed it -- technology, which gained 4.4%. Moreover, the green highlights in the table below show that the biggest inflow of investor assets over the past week, according to Asbury Research's own metric, was into technology. This should come as no surprise, as it is what actually drove the outperformance.
The red highlights show that the biggest outflow of assets over the past one-week, one-month and three-month periods came from health care. This warns that the sector is vulnerable to more weakness after being a market leader for most of the year.
Technology Leading the Way Higher
In the Sept. 28 issue of Market Outlook I pointed out that the Nasdaq 100 was testing major overhead resistance at its March and May lows and 200-day moving average, and said: "It would take a sustained move back above this level to confirm the market rebound that historically takes place during the fourth quarter is under way again this year." This week's first chart shows that NDX exploded above this resistance at the end of last week, which suggests that the index's larger 2015 bullish trend is resuming and clears the way for a retest of its July 20 high at 4,694.
The big influx of sector bet-related assets into technology last week, as shown in the table above, should help to fuel that move as long as it continues.
One Way to Play a Strengthening Tech Sector
The chart below plots electronic gaming company Electronic Arts (NASDAQ: EA), a technology sector constituent stock. After a strong bullish trend that began early this year, EA recently broke out higher from two months of sideways investor indecision.
This breakout from indecision, which took place on Oct. 14, indicates that the 2015 uptrend has resumed and targets an additional 10.8% advance to $83 per share. That target remains valid as long as the upper boundary of the pattern, currently at $68.40, contains prices as underlying support.
Editor's note: John's colleague Tom Vician, CMT, also has good things to say about EA. Tom runs Profitable Trading's quantitative trading system, the Alpha Score, and recommended readers pick up shares of the stock nearly a year ago. Today, readers are up more than 110%. And according to one of the system's key metrics, shares could have even further to run. Other traders who have followed the most accurate indicator in Profitable Trading's history have made up to 212%. Click here to learn more.
Global Markets Sounding the All Clear
In the Oct. 5 and Oct. 12 issues of Market Outlook, I pointed out that the German DAX Index was testing major support at its 2011 uptrend line, and said, "As long as this trendline in the DAX holds, it will support the [typical] seasonal recovery in the S&P 500. On the other hand, a collapse below 9,407 in the DAX would warn a global bear market is emerging."
My focus on the DAX, as well as on the Japanese Nikkei 225 index, was to determine whether recent weakness in China was spreading to other parts of the globe, as such a contagion would likely have an adverse effect on the U.S. market. The chart below, an updated version of the ones in those reports, shows that this has not been the case.
Following two successful tests of the 2011 trendline in August and September, the German index rose above 10,513 last week, which is the intermediary high between those two lows, to confirm a "double bottom" pattern that targets an additional 8% rise to 11,700. Considering the DAX's long-term positive correlation to the S&P 500, I view this pattern as another indirect indication that a sustainable fourth-quarter advance is getting underway in the broader U.S. market.
Low Volatility Also Supports More Strength
In the Oct. 12 Market Outlook, I discussed how waning volatility could point to a sustainable rally in the U.S. stock market. At that point, the Volatility S&P 500 (VIX) had just spent a solid week below its 50-day moving average, indicating investors were collectively confident enough to buy stocks again. The S&P 500 has already risen by 42 points, or 2.1%, since that report. Moreover, the next chart shows that the VIX has remained below its 50-day moving average, currently at 21.93, since then.
It would take a sustained rise in the VIX -- back above its moving average, currently situated at 21.93 -- to indicate that enough fear has come back into the marketplace to trigger another decline. Until then, expect the current market rally to continue.
Putting It All Together
This week's strong rise above overhead resistance in the market leading Nasdaq 100, which was corroborated by two successful tests of major support in the German DAX index and fueled by low volatility, clears the way for more near-term strength to meet my 2,135 upside target in the broader market S&P 500 as discussed in last week's report. Gaming company Electronic Arts is one way to participate in the technology sector's recent surge.
Finally, I would view a sustained rise above 2.12% in the yield of the U.S. 10-Year Treasury Note as another indirect indication of a fertile economic landscape for a fourth-quarter stock market rally to take place.
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