Loss of intermediate tech momentum 'has been weathered really well', says Fairlead's Katie Stockton

Key Concepts

• Intermediate-Term Momentum: A measure of the strength and direction of a market trend over a period of weeks to months.
• Mega-Cap Complex: Refers to the largest publicly traded companies, particularly within the technology sector (e.g., Apple, Meta, Microsoft).
• Cloud Model: A proprietary analytical tool used by Fairlead Strategies to identify key support and resistance levels.
• Oversold Bounce: A temporary recovery in price after a significant decline, often driven by short-covering and bargain hunting.
• Relative Performance: Comparing the performance of one asset or sector to another (e.g., Nasdaq 100 vs. Equal Weight S&P 500).
• Corrective Phase: A period of price consolidation or decline following a prior uptrend.
• Rotation: A shift in investor preference from one asset class or sector to another.

S&P 500 Stall: A Technician's Perspective on Tech's Impact

The S&P 500 has experienced a period of stagnation since reaching an intraday high around 6920 in October. Today, it closed below that level, prompting analysis of this three-month stall. Katie Stockton of Fairlead Strategies attributes this primarily to underperformance within the large-cap technology sector, which has resulted in a loss of intermediate-term momentum behind the S&P 500.

Tech Sector's Influence & Market Character Change

Stockton emphasizes the significant impact of technology on the overall market. While the initial strong uptrend continued to see higher lows after the November low, the loss of intermediate-term momentum represents a “change in character” for the market. This highlights the crucial role large-cap tech names play in driving market gains. She notes, “I really think it’s all about the tech sector…It shows the strength or the impact of technology behind the market.”

Potential for a Tech Bounce & Earnings Impact

Despite the recent weakness, Stockton anticipates a corrective phase culminating in an “oversold bounce,” particularly from mega-cap technology companies. This expectation is tied to upcoming earnings reports, where these companies are largely “oversold” coming into the releases. Specific examples cited include:

• Apple: Reached a support level of 243.
• Meta: Found support based on the Cloud Model and has since gapped upwards.
• Microsoft: Demonstrated signs of life after holding around 450.

Stockton believes this bounce could temporarily lift the major indices out of their current consolidation phase. However, she cautions that longer-term gauges indicate a potential “significant correction” in Q1, driven by the continued loss of intermediate-term momentum.

Key Support Levels & Risk Metrics

Fairlead Strategies is closely monitoring key support levels as risk metrics. These levels, determined using their Cloud Model, are:

• S&P 500: 6720
• Nasdaq 100: 25,000

Stockton stresses that these support levels are “not very strong,” and a breach with downside momentum could signal a more substantial corrective phase.

Implications for Broader Market Rotation

The potential for a tech rebound raises questions about the fate of sectors that have benefited from tech’s recent struggles, such as financials and small caps. Stockton suggests these areas may experience consolidation or pullbacks as focus shifts back to technology. She believes this could create future opportunities to add exposure, as the rotations observed year-to-date are “pretty meaningful.”

Specifically, she points to the Russell 2000 index, noting signs of “short term upside exhaustion.” The relative performance of the Russell 2000 versus the S&P 500 has reversed a downtrend line dating back to early 2023, indicating a shift in investor preference.

Long-Term Outlook & Q1 Correction

While a short-term bounce in mega-cap tech is anticipated, Stockton’s firm expects a more significant correction in Q1. This expectation is based on the deterioration of monthly gauges measuring intermediate-term momentum. The firm will continue to monitor support levels as key risk indicators.

Conclusion

The S&P 500’s recent stagnation is largely attributed to weakness in the large-cap technology sector. While a temporary bounce is expected, driven by oversold conditions and upcoming earnings reports, longer-term indicators suggest a potential correction in Q1. The analysis highlights the critical influence of technology on the broader market and the importance of monitoring key support levels and relative performance to navigate potential shifts in market dynamics.