In a market that has been negatively affected by so much geopolitical uncertainty, it's amazing just how consistent the performance of the technology sector has been. There's a strategy in investing that draws on the same principle found in Newton's first law of motion – an object in motion tends to stay in motion, and an object at rest tends to stay at rest unless acted upon by an outside force.
This strategy is called momentum investing. In momentum investing, you look for the sectors and stocks that are doing well, and you put your money into those sectors and stocks with the anticipation that they will continue to do well in the future unless acted upon by negative news.
One way to find which sectors and stocks are doing well is to conduct a relative-strength analysis. This is an exercise where you compare how well a sector or stock has done in the past compared to other sectors or stocks or to a broad-based index, like the S&P 500. You've seen me do this a number of times in the Chart Advisor when I show the relative performance of the S&P stock sectors.
For example, if you look at the first sector comparison chart below, you will see that the technology sector (lime green line) – as represented by the Technology Select Sector SPDR Fund (XLK) – has been the clear winner on Wall Street since the market pulled back in February 2016.
Knowing this, it should come as no surprise that the top performing sector since the market started rebounding on June 4 has been the technology sector. You can see this in the second sector comparison chart below where XLK (lime green line) is leading the way higher.
Of course, the technology sector has experienced just as much volatility as the other sectors on Wall Street as trade war rhetoric has flared up and cooled down and as threats of tariffs have materialized over night and vanished just as quickly, but the outperformance by the technology sector has remained consistent.
Unless something fundamentally changes in the outlook for the U.S. economy, I wouldn't be surprised to see this trend continue.
The S&P 500 has stalled just above the former resistance level that formed the right shoulder of the index's head and shoulders bearish reversal pattern. This level is currently serving as support, but it is barely holding on.
For two straight days, bullish traders on Wall Street have tried to push the S&P 500 higher, only to see the index fall before the closing bell. It appears that we're seeing another classic example of the old market adage, "Buy the rumor. Sell the news."
Last week, traders were buying hand over fist in anticipation that the Trump administration wouldn't impose tariffs on Mexico and the Federal Open Market Committee (FOMC) would start preparing to cut rates.
Now that President Trump has decided not to impose tariffs and multiple members of the FOMC have stated that they are considering rate cuts, traders are starting to take some of last week's profits off the table.
Risk Indicators – United Technologies and Raytheon
Mergers and acquisitions (M&A) are typically a bullish sign on Wall Street. They signal that corporate management believes the economic outlook and the "synergistic benefits" of the merger or acquisition are strong enough to offset the risks that accompany the endeavor.
Typically, in an acquisition, the stock of the acquiree (the company being bought) will jump higher, and the stock of the acquiror (the company doing the buying) will drop on the announcement. The acquiree's stock usually jumps because the acquiror is often paying a premium for the acquire. The acquiror's stock usually drops because traders get nervous about the additional risk – and oftentimes debt – the acquiror is taking on.
When it comes to mergers, the performance of the related stocks depends on how the deal is structured. Often, one of the companies will be viewed as getting the majority of the benefits from the transaction, and that company's stock price will rise.
Interestingly, in the case of the United Technologies Corporation's (UTX) merger with Raytheon Company (RTN), both stocks are plunging. This tells me that traders have no confidence that the "synergies" outlined by the two management teams will materialize in a meaningful way.
Seeing this is important not only as it relates to the future performance of these two stocks but also as it relates to investor sentiment. Traders who are confident in the future of the market love "synergies" and tend to pay a premium for them. The fact that they are not paying a premium for these "synergies" tells me we've got a long way to go before we solidify bullish trader sentiment on Wall Street.
Share price performance of United Technologies Corporation (UTX)
Share price performance of Raytheon Company (RTN)
Bottom Line – Cautious Optimism
Traders continue to practice cautious optimism as they approach the U.S. stock market. They are optimistic about the bullish impact rate cuts and a possible increase in geopolitical stability could have on the markets, but they are cautiously focusing that optimism on fundamentally strong companies.
Traders aren't chasing long shots at the moment. They only want the sure things.
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