Narrow Tech Leadership Continues As Oil And Rates Fall

Source: DepositPhotos

Oil fell sharply on headlines suggesting another potential deal may be in the works. The reports sounded very similar to previous negotiations, but regardless of whether the news ultimately proves true or false, perception often becomes reality in markets. The headlines sent oil prices plunging and helped push risk assets higher.

More interesting, however, is that the Technology sector has been the only major sector to outperform the S&P 500 over the past 30 days, and by a wide margin — nearly 12.5 percentage points. Every other major sector has lagged the broader market’s returns.

The largest holdings in the XLK remain Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Broadcom (AVGO), Micron (MU), and AMD (AMD). That creates an increasingly narrow market leadership structure. Either the rest of the market will need to rally significantly over the coming weeks to broaden participation, or there is a reasonable chance the large-cap technology names will begin to correct lower.

The realized dispersion measure I track is currently estimated at roughly the 0th percentile over the past five years, suggesting this level of narrow leadership and low dispersion is unlikely to persist indefinitely.

Meanwhile, rates fell sharply, helped by declining oil prices and a quarterly refunding announcement that ultimately proved to be a non-event, with any meaningful increases in coupon issuance still some time away. At least for now, the breakout in the 10-year yield above its multi-year downtrend line has failed, with yields falling back below that level today.

AMD cleared the call wall area of resistance, helping propel the shares higher. Again, the options market can provide insight into, and a better understanding of, the key levels needed for a stock to rise or fall following earnings results. AMD’s results and commentary were clearly good enough, at least for today, to push the stock higher.

Meanwhile, ARM reported results that did not appear nearly as strong as AMD’s, yet the stock is still trading higher. That’s particularly interesting because I thought Palantir (PLTR) delivered better results on both the earnings beat and guidance, yet the stock sold off sharply.

The broader point is that Meta (META), Microsoft, Amazon (AMZN), and Palantir all declined after earnings, largely as the options market had suggested, while Lilly (LLY) rose, also as anticipated. So far, AMD has been the notable exception, and we likely will not know how ARM ultimately trades until tomorrow.

This is why understanding how options are positioned heading into any major event is so important.

Anyway, who knows what tomorrow’s headlines will bring.