foxex: Will Tech Stocks Ride to the Rescue Once Again?

Chart Advisor | INVESTOPEDIA

Focus on the Price

By John Jagerson, CFA, CMT

Tuesday, January 15, 2019

1. Tech stocks retaking the relative-strength crown?

2. S&P 500 looking for 50% retracement

3. British pound shrugs off defeat of Brexit deal

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Major Moves

It's been a banner day for Tech stocks and the Nasdaq, which climbed 1.71% to close at 7,023.80, thanks in large part to statements made by Chinese government officials.

Deputy Governor of the People's Bank of China (PBOC), Zhu Hexin, along with other officials, said the government is looking to spur economic growth in China. The promise of tax cuts, infrastructure spending and increased credit availability motivated traders to click the buy button today.

China has an out-sized impact on Tech stocks because many Tech firms derive the lion's share of their revenue from the growing economy. Skyworks Solutions (SWKS) generates 85% of its revenue in China, Qorvo (QRVO) generates 75% and Qualcomm (QCOM) generates 69%. Even market behemoths Intel (INTC) and Apple (AAPL) generate 40% and 22% of their revenue, respectively.

Ongoing trade hostilities between the Trump administration and China have dampened the growth outlook for China and the Tech sector for the past few months, but today's announcement seems to have calmed trader fears.

This move could lead to Tech stocks retaking the relative-strength lead among S&P 500 sectors. Looking at the sector-based exchange-traded fund (ETF) comparison chart below, you can see that the Tech sector, represented by the Technology Select Sector SPDR ETF (XLK) was one of the top-performing sectors during mid-2018 (lime green line).

Traders are typically bullish on Tech stocks when they are confident in the future of the market and are usually bearish on the sector when they are not.

If this trend can last longer than today, it will confirm the bullish shift in trader sentiment the market has been speculating on this month and could move XLK back to the top of the chart.

S&P 500

The Nasdaq isn't the only index that did well today.

The S&P 500 rose 1.07% to close at 2,610.30 as some of the largest market-cap stocks in the index – Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOGL) and Apple (AAPL) – jumped 3.55%, 2.90%, 3.33% and 2.05%, respectively.

This bullish move has brought the index ever closer to the 50% Fibonacci retracement level of the drop from the index's all-time high of 2,940.91 on September 21 to its bear-market confirming low of 2,346.58 on December 26.

If the S&P 500 can climb up and through this 50% retracement level at 2,643.75, it has an excellent opportunity to remain for the next few months in the same consolidation range between support at ~2,630 and resistance at ~2,815 that the index was in during the latter part of 2018.

Apple Faces Big Risk If China Trade War Ensues
Tech Stocks to Take Hit in Any US-China Trade War

Source: finviz.com

Risk Indicators

In a demonstration of unusually strong confidence in the future of the British economy, currency traders shrugged off an overwhelming defeat of Prime Minister Teresa May's Brexit proposal by Parliament today.

The House of Commons rejected the deal by an crushing vote of 432 to 202, putting the future of Britain's exit from the European Union in jeopardy and raising questions regarding the impact on the British economy.

Interestingly, after an early knee-jerk sell off, currency traders jumped right back in to the Forex market and started buying the British pound (GBP).

As you can see in the 5-minute chart below, this bullish action brought the value of the pound vs. U.S. dollar (GBP/USD) currency pair right back up to where it started the day.

This tells us that the result of today's vote wasn't unexpected and that currency traders don't feel any pressure to panic.

As we typically see with government standoffs, the market doesn't like to react too soon to what might happen, especially when there are a full two months before Britain is supposed to exit the economic union.

Brexit: Winners and Losers

Brexit Has Slowed UK Growth 2.1% So Far: New Study

Bottom line: Putting Past Selling in Perspective

The more bullish signs we see on Wall Street – whether they be buying in the wake of positive government announcements (China) or the lack of selling in the aftermath of negative government announcements (U.K.) – the easier it is to put the late-2018 sell off in perspective.

Yes, it was a tumultuous and disruptive sell off, but after such a protracted bullish market (the longest in history), a market correction like we experienced last month can be healthy.

It's far too early to start looking for the S&P 500 to return to its all-time highs, but it is building a decent bullish foundation that could last well into 2019.

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