Friday, February 12, 2021
1/ Technology stocks closing at new highs
2/Looking deeper into the technology sector
3/ Semiconductors driving the index higher
4/ The bottom line
1/ Technology stocks closing at new highs
Though the major market indexes showed hesitation at resistance for the third day in a row, the indexes drifted higher throughout the trading session. The Nasdaq 100 (NDX) closed at a new all-time high, suggesting that investors would rather stay invested than stay safe. However, this sentiment isn’t limited solely to U.S. markets. Global investors appear to be expressing the same outlook.
The chart below compares Invesco’s Nasdaq 100 ETF (QQQ) with the Australian Dollar and Japanese Yen currency pair (AUD/JPY). These two instruments show a typical correlation coefficient of .75 for any given year, meaning that they move in the same direction three-fourths of the time. The fact that this currency pair is closing at a new high going into the long weekend is a bullish indicator for the technology index.
2/ Looking Deeper Into the Technology Sector
A closer look at the industries within the technology group reveals just where investors are hunting for opportunity most frequently. The chart below compares State Street’s Technology Sector ETF (XLK) with the largest company, by market capitalization, in each industry group of the sector. The top two companies, Applied Materials (AMAT) and Taiwan Semiconductor (TSM), represent two different industry groups connected to the semiconductor industry. TSM represents the semiconductor manufacturing industry, and AMAT represents the industry group focused on making the equipment used by semiconductor manufacturers.
3/ Semiconductors Driving the Index Higher
AMAT shares are very interesting to follow, and not just because they are on an uptrend (see chart below) or that they are coming up on earnings. AMAT shares tend to lead the other semiconductor stocks because they supply those companies with equipment.
The logic goes like this: if sales are booming for Applied Materials, then it is likely that semiconductor companies are expecting to sell more chips. Since the semiconductor industry tends to lead the technology sector in general, strength in AMAT is often a bullish indicator for the market at large. It seems strange that such a strong indication should be given after such bullish moves on multiple time frames, but that’s what chart watchers can observe going into the three-day weekend.
4/ The Bottom Line
Stocks closed higher with the technology sector capturing investor attention. Within the technology sector, semiconductor stocks are doing well, and Applied Materials in particular is outperforming the index. This is a highly bullish signal.
Originally Published on February 12, 2021
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