Tech Rally Scares Bears, Should It?

Investors were on edge at the start of the week as concerns mounted about the health of the stock market rally ahead of the FOMC meeting and earnings from four tech giants.

Many think that the January move higher in stocks was just a bear market rally even though the S&P 500 gained an impressive 6.18% while the Nasdaq Composite rose 10.7%. Many Wall Street strategists, who on average looking for stocks to close below current levels in 2023, think a recession is inevitable and that earnings valuations are too high.

Stocks reflected the nervousness on Monday as they had the largest drop of the month with the Nasdaq 100 losing 2.1%. Apple
AAPL
, Inc. (AAPL) and Microsoft
MSFT
(MSFT) led the decline. This reassured the stock market bears as Morgan Stanley commented “We think the recent price action is more a reflection of the seasonal January effect and short covering after a tough end to December and a brutal year.”

But instead of declining for the next three days, the S&P 500 had gains of 1.46%, 1.05% and 1.47% over the next three days. It was lower Friday but still was up 1.6% for the week. Overall it was still a mixed week for the markets.

The Dow Jones Transportation Average led the averages, gaining 7.2% which was quite a bit better than the 3.9% gain in the iShares Russell 2000. Both were better than the 3.3% gain in the Nasdaq 100.

The big loser for the week was the SPDR Gold Shares (GLD
GLD
) which was down 3.2% while the Dow Jones Utility Average declined 1.5% and the Dow Jones Industrial Average had a small loss.

As was the case at the start of the new year, the NYSE Advance/Decline numbers were better than 2-1 positive and on the NYSE Composite, there were 356 stocks making New Highs and just 18 New Lows.

The NYSE Composite was slightly higher last week as it reached the resistance, formerly support, line a, in the 16,133. There is good support now at the former downtrend and the 20 week EMA at 15,355 which is 4% below Friday’s close. A drop to this support would not change the positive outlook but is likely to encourage the stock market bears. The weekly starc+ band and stronger resistance are in the 16,770 area.

The NYSE All Advance/Decline line has moved further above its WMA with last week’s numbers. The improvement in the A/D numbers was signaled by the move in the A/D line above is WMA, point 1, the first week in January. The move through the downtrend, line b, four weeks ago was a bullish signal for the intermediate term (point 2). The wide gap between the A/D line and its rising WMA does allow for a pullback.

The daily starc+ band for the Invesco QQQ
QQQ
Trust (QQQ) was exceeded on both Thursday and early Friday before the QQQ closed down 1.8%. The 38.2% Fibonacci resistance at $313.26 was exceeded on Thursday. The breakout level on the daily chart, line a, is at $297.99. The rising 20 day EMA is 5.9% below Friday’s close at $289.44.

The daily Nasdaq 100 Advance/Decline line overcame its downtrend, line c, on January 13^th, and the November highs were just exceeded last week. Unlike the NYSE All A/D line it has not overcome the more important resistance at line b. Therefore, the intermediate-term trend for QQQ has not yet turned positive.

The strength in tech giants Microsoft Inc. (MSFT and Apple, Inc. (AAPL) last week likely made the stock market bears more nervous as they were up 3.4% and 5.9% respectively. From the early January low of $124.17, AAPL is up 24.4%. The weekly starc+ band at $154.79 was exceeded last week. There is strong support now at $143.47 and the 20 week EMA.

The strong gains for AAPL after a miss on earnings got the market’s as well as the financial press’s attention. The weekly relative performance (RS) has moved above its WMA but needs to overcome the resistance at line b, to indicate that AAPL is a market leader. The volume increased last week and the OBV has moved above its WMA.

So far in 2023 growth stocks have outperformed value as the Russell 1000 Growth (IWF
IWF
) is up 11.4% while the IWD
IWD
is up 5.6%. When the ratio of these two ETFs is rising then growth stocks are leading. When the ratio is falling, as was for most of 2022, value stocks are leading.

Growth stocks led from late 2008 to the fall of 2021 and in my view, the major trend then changed in favor of value stocks. The ratio has moved above its 20 week EMA and could rally to the downtrend, line a, and possibly the major resistance at line b. The MACD-His turned positive two weeks ago after forming a positive divergence, line c. This is a sign the rally can continue.

There are several signs that the stock market may be ready for a setback or at least some sideways action over the next week or so. The positive readings from the A/D lines suggest that a correction will be another buying opportunity.

The record call buying on Thursday is probably a sign that the fear of missing out (FOMO) has gotten too high. I would suggest that you use relative performance analysis to help you find stocks and ETFs that are outperforming the S&P 500. Most of all do not chase prices and examine the risk on all new positions.