The Tape Says One Thing, Headlines Say Another

Stocks continued their torrid rally last week, and erased 5-weeks worth of gains in a matter of 8 trading sessions. 

Despite this rally, headlines emerged over the weekend that could lead to another energy crunch, which has been the Achilles heel of this market.

Needless to say, the market is shaping up for another classical showdown between its internals and the prevailing narrative.

The market’s price action over the past couple of weeks has followed the historical precedent of new bull runs. 

Growth Holds Firm Near-Term

Technology claimed the top spot for the second consecutive week. That is exactly what bulls want to see coming out of a market bottom.

Tech leading out of lows is not a coincidence. It is a pattern with deep historical roots. We saw the same thing play out just last year when growth stocks surged off the lows and dragged the rest of the market higher. When risk appetite returns, it shows up in tech first.

There were notable shifts elsewhere on the leaderboard too. Basic materials overtook energy as the top-performing sector over the past 30 days. Energy still holds the top spot year-to-date and over the trailing year, but its grip on the 30-day window is slipping.

That matters. It tells you that the capital flows which fueled the energy trade for months are starting to rotate. The sector leaderboard is going to take time to fully reset, but the early evidence is encouraging coming off the March 30 low.

What Needs to Hold This Week

This week presents a real stress test. The latest geopolitical headlines could reignite the energy trade and pull capital back out of growth. If that happens, the rally stalls.

Here is what I am watching. If technology holds the 1-week leadership spot through Friday, it validates the rotation. If growth flips the 30-day spot from basic materials, it would all but confirm that new all-time highs are ahead.

The confirmation does not need to be dramatic. It just needs to be consistent. I need to see follow-through buying that holds into the close on consecutive days. One or two strong sessions mean nothing if they get sold into by the weekend.

There is one more data point worth paying attention to. Semiconductors have already made new all-time highs again. Semis are notorious for leading directionally in both bull and bear markets. When they break out to new highs, the broader market tends to follow.

The perma-bears are going to point to the weekend headlines and tell you the rally is a trap. These are the same people who stayed short through eight straight sessions of buying. They are fighting the tape, and the tape always wins eventually.

I have been clear about my positioning throughout this entire cycle. I was cautious when energy dominated every timeframe on the leaderboard. Now that growth is reasserting itself, the evidence supports a more offensive stance.