How July's Tech Rally Has Played Out Across Other Markets

The following stocks have been highlighted by VantagePoint Software, an artificial intelligence platform that provides market forecasts 1-3 days in advance.

2018 has been a very range-bound year for the market. After a weak June, the S&P 500 has rebounded back to the 2800 level—the same area it topped out at in mid-March.

Since the SPDR S&P 500 ETF SPY hit its low for the year on February 9, the fund has traded almost exclusively between 2550-2800. However, that doesn’t mean there aren’t opportunities to be had for short-term traders.

With the broader market in a trading range, let’s drill down one level deeper to the sectors. These are worth watching not just because they can give ideas as to how the stocks within them may behave, but because they can paint a picture of what areas of the market are currently in favor and out of favor.

It may be hard to see at times but the 11 sectors that make up the S&P 500 are all related. When one sector shows particular strength or weakness, as technology did in June, that presents opportunities.

The charts below, from forecasting software VantagePoint, shows these relationships in action. The green and red shaded areas represent uptrends and downtrends respectively, and are determined by an analysis of the global markets—an intermarket analysis—using artificial intelligence. The software takes these connections into account and forecasts a prediction for the next 1-3 trading days.

This prediction takes the form of the blue line, a predicted moving average, and the gray candle on the far right side of the chart, which shows their predicted trading range for the current trading day.

An Opportunity From The Tech Weakness

Take the 3-month chart of the Technology Select Sector SPDR ETF XLK for example.

Chart courtesy of Vantagepoint

At the beginning of July the ETF crossed from a downtrend into an uptrend. We can see that by the blue predicted moving average crossing above the black line, a simple 10-day moving average. On top of that, the platform’s Neural Index has mostly been green, indicating near-term positivity.

However, the two lines have clearly converged in the last week, indicating that the trend has, at the very least, gotten weaker.

Looking at some of the components of the ETF, we can see a very similar pattern play out. Here’s Microsoft Corporation MSFT for example, earnings gap up notwithstanding.

Chart courtesy of Vantagepoint

And PayPal Holdings Inc PYPL, which unlike Microsoft is not one of the fund’s largest weightings.

Chart courtesy of Vantagepoint

Since that change in trend in the first week of July, the XLK is up 4.6 percent, MSFT is up 8.2 percent, and PYPL is up 5.4 percent.

Notice how all three charts essentially show the same pattern (again, Microsoft’s gap up from earnings notwithstanding). If you believe in market rotation—that different sectors are strong at different times—then you would say that the money has flown back into tech the past few weeks. This isn’t to say that every technology stock will start trading up, but it signals that the sector as a whole is in favor. So stocks that have not had significant bounces in the past week, like Twitter Inc TWTR for example, could be in for more upside in the short-term.

Looking more broadly, the late-June tech sell-off was another example of how correlated technology is to the overall market.

This is a chart of the SPY over the same time period.

Chart courtesy of Vantagepoint

And here’s the iShares Russell 2000 Index (ETF) IWM.

Chart courtesy of Vantagepoint

Those ETFs hold the 500 largest and 2,000 largest U.S. stocks respectively, and they essentially show the same patterns as the XLK. When we see a sector as powerful as technology drive down the market (and subsequently rebound), that’s an immediate indicator that you can follow the sector on the way down and then back on the way up by being active in sectors that are following the trend.

Most of the other sectors have done just that, but not all. The Utilities SPDR ETF XLU was quite strong for the month before dropping after international trade tariffs officially went into effect.

Chart courtesy of Vantagepoint

Had that fundamental news not taken hold of the sector, it could have been to watch for potential downside as money rotated out of that and into the tech rebound.

When you see a trend play out across an asset class (U.S. equities in this case) it’s also a sign to look towards other markets. Light sweet crude oil futures had a very strong June, as investors were clearly favoring the energy futures market, but that trend has quite clearly reversed in July.

Chart courtesy of Vantagepoint

The global markets are always impacting one another, it’s simply a question of how much and how to capitalize. It’s easier to play these relationships when strong trends stand out, as was the case at the end of June.

VantagePoint is a content partner of Benzinga. To get a free demo of VantagePoint Software click here.