Overall, this proved to be a very constructive week for US equities, as Technology broke out and outperformed sharply, defensive sectors gave way, and market breadth pushed out to new highs while sentiment largely remained muted. Both crude and interest rates fell this week, and all of this, coupled with above-average earnings and good economic strength, suggests the US equity market and economy remain in good shape. My thinking is that this week’s minor two-day consolidation should now be starting to push back higher, and I am anticipating a further rally in the days ahead, with dips remaining buyable for those with near-term timeframes. While a period of consolidation very well could get underway eventually as August progresses, it looks premature to expect US equities to peak right away, and it’s right to lean bullish heading into next week. Within Technology, Software continues to look like a better area for positioning than Semiconductors, while Memory stocks have not yet stabilized enough to favor. Meanwhile, despite this week’s sharp rally in precious metals, gold’s bounce looks premature to chase, with a bottoming process likely still ongoing into late August.
QQQ’s breakout from its two-day consolidation tilts the odds toward a test of all-time highs into mid-to-late next week
Equities continue to react positively to the idea that rate hikes can be postponed, and this week’s economic data reinforced that idea. Bond yields have retreated, and Technology’s +1.54% gains today have helped QQQ break out of the minor two-day downward consolidation, which should tilt the odds toward a push up toward all-time highs into mid-to-late next week.
The key level will be 728.54, which was reached earlier this week, and the ability to get over that level argues for a push to 740–746.
Until Memory stocks can start to stabilize a bit more, it might prove premature to expect an immediate breakout in QQQ back to new highs. As discussed earlier this week, there is a cyclical turning point that might arise near 8/12–14, but I expect that US equities likely rally into this timeframe.
The reason for equities to possibly begin to slow has to do with the rally from late July getting stretched as it completes the fifth and final wave off the late-July lows. Furthermore, both rates and crude should begin to bounce starting in mid-August, and I don’t suspect equities will react kindly to that development.
Thus, while I expect Friday’s rally to follow through next week, I’m anticipating that 740–746 should prove to be a strong near-term test.
Invesco QQQ Trust (QQQ, daily) — Friday’s breakout from the minor two-day consolidation argues for a push over 728.54 en route to a test of all-time highs
Software remains a better area for positioning within Technology than Semiconductors, following June’s breakout in the IGV/SOXX ratio
Many have asked about ways to invest in Technology, and I thought it might be beneficial to run through some of the sub-sector relationships to see exactly what’s been trending of late, and whether it’s best to be positioned in Semiconductors, Software, or Memory stocks.
The first chart worth sharing is that of IGV vs. SOXX in ratio form. This broke out back in early June, and suggests Software remains a better area for positioning within Technology than Semiconductors at the moment.
If one possibly extrapolates this move and utilizes DeMark counts to ascertain how long this relative outperformance of Software over “Semis” might last, it’s prudent to notice that the weekly TD Sell Setup count is on a bar 5 and normally peaks on an 8 or 9 count.
Thus, the next few weeks likely will see Software outperform Semis, as the acceleration following this lengthy trend breakout should still favor IGV doing better than SOXX in the short run.
iShares Expanded Tech-Software ETF vs. iShares Semiconductor ETF (IGV/SOXX, weekly) — June’s breakout in this ratio suggests Software is the better area for positioning vs. Semis
Memory stocks have not stabilized sufficiently vs. Technology to merit overweighting, though this trend is worth watching
The DRAM/RSPT ratio chart plots the ETF DRAM (Roundhill Memory ETF) vs. Invesco’s equal-weighted Technology ETF (RSPT). Following the breakdown in July, this remains trending lower, and investors probably have recognized that this sub-sector continues to have massive volatility, as seen by today’s losses in stocks like STX, WDC, and SNDK, which all fell greater than 3% in Friday’s trading despite QQQ being higher by more than 1% on the day.
Thus, while Technology has rebounded, Memory stocks as per DRAM largely have not stabilized sufficiently, nor turned back up vs. RSPT enough, to merit overweighting Memory stocks as one’s primary Technology investment.
This looks to take time, but it’s important to watch for evidence of this trend starting to give way, as I anticipate Technology likely works well next week and QQQ should rise to within striking distance of all-time highs. Any trend breakout in DRAM vs. RSPT would put Memory stocks “back on the front burner.” Until that time, it pays to be selective within Technology, and at present, Memory stocks continue to lag performance.
DRAM vs. equal-weighted Technology (DRAM/RSPT, daily) — Downtrend remains intact, and Memory has not yet turned back up sufficiently vs. RSPT to favor
Gold’s bounce very well could come to an end next week, with a bottoming process likely extending into late August
Despite a sharp rally in precious metals this week, there are still reasons to suspect that a bottoming process is ongoing, and price might have to revisit lows into late August. First, the Elliott pattern of the gold move from June doesn’t look terribly “impulsive,” as the first move off the June lows was notably overlapping and choppy. Second, gold rallied this week as economic data paved the way for lower rates. However, the larger pattern suggests a dip in rates should prove temporary only before a push back to new monthly highs.
I doubt gold can ignore sharply rising rates, and I expect that this recent bounce very well could come to an end next week before turning back down. While I like the prospects for gold in the months ahead, I’m still a bit skeptical that it’s right to chase this bounce given what the trajectory of real rates suggests.
As shown below, spot gold is nearing the highs of its Ichimoku cloud on daily charts. If my wave count is correct, there should be some early-week backing and filling before another stab higher which might last into late next week.
Thereafter, I think it’s worth paying close attention for the possibility of gold’s bounce coming to an end, led by interest rates starting to turn back higher.
Gold (daily) — This week’s sharp bounce looks premature to chase, with lows possibly being revisited into late August as rates turn back higher
______________________________
PS: If you are enjoying our service and its evidence-based approach, please leave us a positive 5-star review on Google reviews —> Click here.