What if Technology Breaks Out?
This is a question that was posted on Twitter yesterday by my friend Ian.
My response of “Face Ripper” is only half a joke. If we are just looking at the S&P 500, the technology sector makes up 25% of the market. Ian’s point is that the market has been strong while the technology sector has not gone anywhere for the past three months. What if technology stocks (think Apple, Microsoft, Intel) begin to move higher also? Well, if the market can hold up when 25% of it is simply spinning it’s wheels for three months we could see a big move to the upside if tech decides to join the party. In fact it could happen fairly quickly, hence “face ripper.” Here is the ETF that tracks the technology sector (XLK) with one last hurdle to jump before reaching new all-time highs.
I have been writing in my notes to clients that it makes sense to be positioned for a move higher into the end of year and into the beginning of 2021. I think the that as long at the S&P 500 is above 3,400, it is probably going to 4,130. I don’t think this is far fetched. I have written in the past that I think we are closer to the beginning of a cyclical bull market than to the end. If technology gets in gear, this case would be made stronger. It seems the World Semiconductor Trade Statistics agrees, saying that the semiconductor market is expected to increase by 5.1% in 2020 and accelerate to 8.4% in 2021. I place a lot of importance on the semiconductor industry both for the technology sector and the market as a whole.
We have also talked about the fact that the global economy is probably getting better. We have also written that this is largely expected by investors. For the market to continue to move up, it will likely need positive surprises. Over the past two days, there have been a few of those. Purchasing Manager Index reports from Japan, China, the Euro zone came in ahead of expectations. South Korea saw their latest GDP report slightly beat estimates as well. In the US, construction spending was ahead of what economists forecast. With that, the price of copper continues to move higher as the price of gold remains under pressure, a sign that investors continue to see a light at the end of the tunnel. Here is the ratio chart that I like to use.
If the S&P 500 were to fall below 3,400 then I will have to adjust my thinking. There is always a price that says you are wrong, at least in the short-term.
*Noting in these pages should be considered investment advice. This is simply a journal of my thoughts as I study what is happening in the world and how it could impact asset markets.