WEEKLY TECHNICAL MARKET BRIEFING  07/21/24

Stocks Post Biggest Negative Week Since April

Stocks experienced wide swings last week, with an early-week rally that sent some U.S. markets to new all time highs, but which faded toward week's end, led by weakness in the tech sector. The major indexes finished mixed, with the S&P 500 and Nasdaq closing lower on the week, while the Dow posted a solid gain.

 Weakness in the tech sector was the primary driver last week, highlighted by a divergence in the broader indexes, as the S&P 500 and Nasdaq posted losses The S&P 500 fell over 2%, and high-flying Nvidia closed the week down nearly 10%. The Dow (with a lower exposure to technology stocks) finished higher, briefly topping 41,000 for the first time and extending its weekly winning streak to three.

Leadership rotation was the key theme for financial markets last week. The tech sector faded while cyclical sectors, which have lagged this year, saw upward momentum. This was underscored by the sharp rally in small-cap stocks. A sizable rotation within the stock market captured traders significant attention. 

Crypto posted a strong green week, with bitcoin rising over 10%. This marked bitcoin's second consecutive green week after 4 consecutive red weeks, one of which slashed its price by nearly 11%.

While equities have delivered solid returns this year, overall S&P 500 gains have been buffered by sharp gains in the largest tech companies. Because the S&P 500 is market-cap weighted, larger companies have a larger influence on index moves. The average year-to-date gain for the mega-cap tech names (Apple, Microsoft, Amazon, Alphabet, Meta, NVIDIA, and Tesla) of 37% has been a powerful force for much of 2024, a continuation of 2023's trend in which the vast majority of the S&P 500's 26% gain was attributable to the so-called "Magnificent 7" cohort.

The tide turned noticeably last week, with the S&P 500 equal-weight index materially outperforming, reflecting the underperformance of the largest technology and communication services names, while cyclical sectors, like financials, industrials and energy, outperformed recently.

Perhaps the most notable tide change last week was the emergence of small-cap stocks. After spending much of 2024 treading water, small-cap stocks surged early last week enforced by a growing confidence in a coming, Fed rate cuts, signs that the economy is slowing but still exhibiting sufficient vigor to sustain the expansion; and election read-throughs, with a shift in expectations for Trump and pro-growth policies (such as a proposed lower corporate tax rates).

The outperformance of small-cap stocks may indicate a possible shift toward more cyclical, economically sensitive investments, as the prospects of easier Fed policy bode well for performance in these segments of the market. Second-half consensus earnings estimate for small-caps are healthy but will require the economy to demonstrate resilience in the coming quarters. If that occurs, I think small- and mid-cap stocks would benefit from renewed economic optimism.

Looks like the immediate period ahead may see a short-term low followed by another rally try. The quality of that rally based on underlying technicals may give us clues as to where the markets want to go

In any case , as usual "Trade What You See, Not What You Think".

Harry Boxer, TheTechnicalTrader.com