Tech Boom Propels Markets to Record Highs

S&P 500 and Nasdaq-100 Soar, but Market Breadth Sinks and Divergences Amount

Breadth and Trend Studies:

We're witnessing a rare whipsaw in our medium-term breadth studies, which recently turned negative again, underscoring the mediocre performance of most stocks and sectors lately. Despite this, the S&P 500 and Nasdaq-100 continue to hit new highs almost daily.

The short-term component is also on the verge of flipping back to negative, potentially triggered by today's market close, depending on the action.

The chart below illustrates the S&P 500's short-term uptrend since early May, consistently closing above its 21 EMA and reaching new highs.

However, the breadth indicators paint a different picture. The mid-term gauge is at a low level, fluctuating between positive and negative. Additionally, the long-term breadth measure shows a continuous decline, now at levels comparable to those seen during the bottom of April's pullback.

Typically, a deterioration in the mid-term breadth study precedes a significant pullback or correction affecting most stocks, indices, and sectors. However, over the past month, this deterioration hasn't disrupted the short-term uptrend of the S&P 500 and Nasdaq-100. The VIX remains very low and in a downtrend as well. Until the short-term trends in these indices turn negative, we can expect a choppy and highly selective market, but no major downside.

We are in a bull market and must give the bulls and positive resolution the benefit of the doubt.

Nasdaq-100, Technology and Semiconductors are Overbought:

The sectors driving the indices higher have now reached significant short-term overbought conditions. This is particularly evident in the technology sector, which is notably stretched from its short-term moving averages.

Overbought signals in the mentioned sectors are not very effective in predicting an important move to the downside but many times they precede a period of consolidation that cools off momentum and allows short term moving averages to catch up.

Rates:

Despite the FOMC's rhetoric of just one rate cut for 2024, long-dated treasury bonds have been rallying recently, closing at a three-month high yesterday and trading above their 200-day moving average pre-market. Dropping rates should help maintain the bullish market sentiment and potentially cause some sector rotation into interest-sensitive sectors as technology cools off in the coming weeks.

Homebuilders (XHB) should benefit from lower rates and look bullish, having recently triggered a new short-term uptrend.

That is all for today.

Best regards,

Victor Riesco, CMT