The Nasdaq 100 index and big tech stocks could rally into year end despite trade and economic headwinds that have clouded long-term outlooks at the most profitable Silicon Valley icons. While a broad-based uptick is possible, careful stock-picking may be needed to generate the healthiest short-term returns, given bearish macro themes. Market timing skills may also be needed because 2020 could be a bad year to own stocks.
Strong price action could reignite bull market calls, but this looks like a short-term phenomenon, with technical stars aligning for a quick rally burst. For starters, we've now entered the most seasonally positive time of the year for big tech stocks, after exiting a traditionally weak period with little or no downside. This impulse doesn't play out every year, as we discovered in 2018, but an accommodative Fed and the deceleration in trade tensions could increase short-term risk appetite.
Mathematics is also waving a green flag in favor of a year-end tech rally. While the Nasdaq 100 has gained just 10% in the past 12 months, the 2019 return stands at a much healthier 24% due to V-shaped price action after the December 2018 swoon. Portfolio managers will protect those gains at all costs to show clients that they're making the right calls in a tough environment, predicting bullish window dressing activity between mid-November and year end.
Positive price action in Dow component Apple Inc. (AAPL) provides another excellent reason to be bullish about big tech at this juncture, breaking out to an all-time high last week despite legitimate concerns about third quarter iPhone sales and the impact of Chinese tariffs. This rally could presage similar breakouts in other relatively strong tech components, including Microsoft Corporation (MSFT).
Chip stocks look like the wild card in this equation, with the PHLX Semiconductor Index (SOX) holding up surprisingly well during those quick summer downdrafts. The index has been testing a historic breakout above the 2000 high for more than 18 months and now needs just 30 upside points to confirm the rally and set the stage for excellent 2020 returns. KLA Corporation (KLAC) and Lam Research Corporation (LRCX) look like best bets in this group for the fourth quarter and beyond.
QQQ Weekly Chart (2015 – 2019)
The Invesco QQQ Trust (QQQ) completed a round trip into the 2000 "bubble" high at $120 in 2016 and broke out, entering a powerful trend advance that stalled above $185 in the third quarter of 2018. It has posted two nominally higher highs since that time, while three downdrafts since December have posted higher lows. Taken together, price action has drawn a rising wedge pattern that is testing new support at the 2018 peak.
Wedge resistance now lies at $300, which also marks a psychological resistance level as well as the 1.272 Fibonacci extension of the October into December decline. This alignment could mark a final destination for the fund into year end while establishing 2020 trade setup for a wedge breakout that supports a fresh bull run. However, it isn't wise to play for that outcome just yet due to the short-term nature of the current advance.
The on-balance volume (OBV) accumulation-distribution indicator also warns market players to utilize an aggressive timing strategy. It topped out in March 2018, well ahead of price, and fell to a two-year low in December. Buying interest into the third quarter of 2019 carved two failed breakout attempts, while distribution into October is testing seven-month support. While OBV looks bearish at first glance, it also reveals a large supply of short sellers who could get trapped by higher prices.
The Bottom Line
The stars are aligning for a year-end big tech rally that could catch the majority of market players off guard.
Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time publication.