Market-Leading Technology At A Tactical Decision Point

Conclusion, Investment Implications, Strategy

Large cap Technology stocks, which haves been one of the few and occasional US broad market leaders since May, are at a Tactical inflection point.  If this integral part of the market it is to continue leading, it must reengage its current Tactical uptrend from right here.  If it does not, however — which recent relative underperformance versus the S&P 500 warns of — it could become the canary in the coal mine for an overdue corective US broad market decline.

Introduction

For months we have been stating that — although the broad market S&P 500 (SPX) has managed to remain above its 50-day moving average since Jan 29th via a very strong and almost Pavlovian “buy-the-dip” mentality by investors — market leadership has been spotty at best.  The traditional market leaders during a normal, healthy bull market — Semiconductors, Technology, and Small Cap — have for the most part been inconsistent leaders in 2021.  And the only two that have actually lead at times — Semis and Tech — have been passing that mantel back and forth like they don’t want it.

This report takes a closer look at Technology — specifically large cap Tech via the NASDAQ 100 (NDX) and its current test of Tactical (monthly) support.  How large cap Tech resolves this inflection point is likely to be a leading indication of whether or not the broad market S&P 500 gets an overdue corrective decline between now and early October.

Analysis

About halfway through today’s trading session, Chart 1 below shows that the market-leading NASDAQ 100 (NDX) is testing — and thus far is rebounding from — its 21-day  moving average for the 4th time since first rising above it on May 24th to turn the Tactical (monthly, our Tactical time frame) positive. 

The 21-day MA, currently at 14,974, is where that Tactical uptrend should resume if still valid.

Chart 1

The red highlights in the lower panel of Chart 2 below show that the daily total net assets invested in the Invesco QQQ ETF (QQQ), which tracks NDX, are testing their 21-day moving average from above.  The chart shows that these assets have been above their 21-day MA since May 24th to indicate a trend of monthly expansion — and that this trend has fueled a 12%  rise in NDX (upper panel). 

Chart 2

Like the test of monthly price support in Chart 1, this test of the trend of monthly expansion in investor assets flows also identifies a Tactical decision point for NDX — and the large cap Tech stocks it represents — from which that trend should resume if still valid.

The rightmost red highlights in the lower panel of Chart 3 below show that QQQ shifted to a trend of monthly relative underperformance versus the benchmark S&P 500 (SPY) as of Aug 10th.  The leftmost red highlights show that a similar trend of monthly relative underperformance by QQQ versus SPY between Apr 28th and May 24th coincided with an 8% outright decline in QQQ and a coincident 8% decline in NDX (not shown). 

Chart 3

So, while Charts 1 and 2 suggest that the late May Tactical advance in large cap Tech, as represented by NDX and QQQ, is still intact but being tested, Chart 3 warns of an emerging downside resolution to this test. 

A decline below NDX 14,974, and/or a new trend of monthly contraction in the total net assets invested in QQQ, would confirm this and suggest that a Tactical correction has begun in this market-leading index.