Last week delivered a big win for large-cap tech bulls
If you are a large-cap tech investor, last week was rewarding, assuming you are a bull. The Invesco QQQ Trust (QQQ – 348.40), a large-cap tech proxy, powered its way to its highest level since April 2022 on the heels of Nvidia’s (NVDA) earnings and Citigroup's upgrade of the tech sector to “overweight.”
Ironically, Friday’s multi-month high happened almost exactly one year after a Bloomberg BusinessWeek cover story titled “The Great Tech Rout.” This cover did not have immediate contrarian implications, as the QQQ went on to make its low in October 2022 -- though most of the damage had already been done since its November 2021 peak.
A major contrarian take -- on the heels of the QQQ taking out its August 2022 peak last week -- is that many familiar large-cap tech names have shown up regularly as being net sold. This is per one major brokerage house that reports the top names that were net bought (or net sold) by its clients in the prior month.
“Unlike the prior six weeks, there was finally a substantial directional move in the S&P 500 Index (SPX – 4,191,98), as the index moved higher by 68 points relative to the prior week’s close. This absolute move was nearly double the highest Friday-to-Friday close seen in the second quarter.”
- Monday Morning Outlook, May 22, 2023
While the S&P 500 Index (SPX – 4,205.45) closed at its highest level since August 2022, it reverted to its familiar ways we saw in the weeks leading up to May standard expiration week. While last week’s day-to-day movement was anything but boring, the net direction from weekly close to weekly close was negligible. For example, from the previous Friday’s close to the Wednesday closing low and back to the Friday close, the SPX traveled 167 points. But the Friday close was just 14 points above the previous Friday’s close.
The silver lining is that the low occurred in the 4,120 zone, which as I said last week, “… was touched many times throughout April and the first half of May, and is a rough midpoint of the narrow range during those weeks.”
Moreover, the index closed above 4,160 for the second consecutive week, a level that I have mentioned numerous times as an emerging point for sellers since May 2022. Plus, this mark is 10% above the December 2022 closing low.
“Also beware that a pivot or hesitation could occur at two levels immediately overhead: 1) the round 4,200 century mark and/or 2) the 4,225 level, which is exactly 10% above the 2022 close.”
- Monday Morning Outlook, May 22, 2023
Based on the selling early last week, it is still questionable if the SPX’s 4,160 is behind us for good, or if a chop above and below 4,160 is in the cards. Even if 4,160 is behind us, the next potential hesitation or pivot point is in view already. This is usually the case as the market attempts to recover from long, steep declines, as the index experienced from January into October 2022.
As we enter this holiday-shortened week, the potential levels of resistance are described in the excerpt immediately above. And if or when these levels are taken out, the 4,300-century mark, or August 2022 high, will become another level of chart fixation.
From a sentiment perspective, Citigroup’s upgrade of U.S. stocks to "neutral," with an "overweight" rating on technology, caught my eye. In December, Citigroup had turned negative on stocks. While “neutral” isn’t exactly a ringing endorsement, it is clear these strategists aren’t as negative as they once were.
I find this interesting because in the period from early April to early May, with the SPX ranging in the 4,100 area – which was where Citigroup moved to “underweight” in early December -- strategists at J.P. Morgan Securities, Wells Fargo and Goldman Sachs issued notes suggesting they were posturing for weak price action in the weeks and months ahead.
One has to wonder if these strategists will reevaluate their views, similar to Citigroup last week? But with debt-ceiling headlines still swirling and the jury still out as to whether the Federal Reserve will pause its rate hike cycle or even lower rates, there is also reason to believe strategists will be reluctant to change their views. Regardless, to the extent there are investors following their cautious views on the market, they will likely drive stocks higher versus lower.
Stay tuned.
Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.
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