3 Reasons Why Stocks May Be on the Verge of a Breakout

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3 Reasons Why Stocks May on the Verge of a Breakout

Stocks climbed again last week as investors kept piling into the technology sector. Is a breakout coming next?

The S&P 500 rose 1.8 percent between Thursday, July 2, and Friday, July 10. The index closed at its highest level in a month as the economy improved and earnings season approached. Even with coronavirus cases still rising, investors may see three reasons to be bullish.

First is the technical setup on the S&P 500. The 50-day moving average had a “Golden Cross” above the 200-day last week, a potential sign that longer-term momentum is turning positive.

The index has also consolidated into a tight range after forming a “cup-and-handle” pattern. It’s even held above its mid-June peaks and rebounded from a false breakdown on Thursday. That may indicate buyers outnumber sellers.

S&P 500, daily chart, with key patterns indicated.
S&P 500, daily chart, with key patterns indicated.

Bull Markets Often Climb Walls of Worry

It’s not a surprise when you look at the American Association of Individual Investors’ sentiment survey. Just 27 percent of respondents last week were bullish. It’s up from the previous reading of just 22 percent, but is still far below the 10-year average of 36 percent.

Are the fears justified? Some of the economic numbers might give reasons for optimism. Last week, for example, jobless claims not only fell to their lowest level of the crisis. They also beat estimates by the widest margin since the layoffs began in late March.

Biggest Gainers in S&P 500 Last Week
Netflix (NFLX)+15%
Twitter (TWTR)+15%
Freeport-McMoRan (FCX)+13%
Amazon.com (AMZN)+11%
Air Products & Chemicals (APD)+10%

There’s also been a shift to global stocks as China reopens and the Federal Reserve keeps interest rates low. That’s weighed on the U.S. dollar, which is often a positive for stocks and risk appetite.

Technology Is Flying

The third, and most important reason, is technology. Coronavirus accelerated shifts toward cloud computing, video gaming and e-commerce. There was also an existing trend toward Chinese companies following years of institutional reform by Beijing. That move has picked up steam in recent weeks.

Initial public offerings (IPOs) have also come to life. Digital insurance agent Lemonade (LMND) and health-tech provider Accolade (ACCD) both surged after going public. That’s a sign of investors looking beyond a narrow set of giant names to lead the market.

Speaking of giant names, did you know Alphabet (GOOGL) reclaimed its $1 trillion market capitalization last week? It’s back in that elite club with Apple (AAPL), Microsoft (MSFT) and Amazon.com (AMZN). Facebook is next on the valuation list, closing at $697 billion on Friday.

Alphabet (GOOGL), daily chart, showing breakout to new high and "Golden Cross" chart pattern.
Alphabet (GOOGL), daily chart, showing breakout to new high and “Golden Cross” chart pattern.

Semiconductors could be another area to watch. Chip makers have mostly underperformed other technology groups like software because they’re more vulnerable to recessions. But last week they broke out to new highs.

Finally, Environmental, Social and Governance (ESG) stocks are another story in tech. The ESG trend has helped spur interest in electric vehicles and solar energy. Both surged last week despite cheap oil, a sign of real demand for alternate fuel sources.

Netflix Breaks Out Before Earnings

Netflix (NFLX) was the biggest gainer in the S&P 500 last week. The streaming-video giant surged 15 percent after Goldman Sachs predicted cash flow will surge to $100 million. Subscribers are also expected to climb by 12.5 million.

Big banks like JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup also report this week. (See our guide to earnings season for more.)

Biggest Decliners in S&P 500 Last Week
Mohawk Industries (MHK)-29%
Oneok (OKE)-17%
Hess (HES)-13%
Marathon Oil (MRO)-13%
Dominion Energy (D)-11%

Gold and silver miners, Chinese technology stocks and Internet companies were some of the other big leaders last week. Banks, energy and small-caps performed the worst. That’s a continuation of the longer-term trend with investors favoring new-economy growth stocks over old-economy value names.

Aside from the start of earnings season, this week also features some important economic news:

  • Tuesday: Consumer price inflation.
  • Wednesday: Crude oil inventories, the Fed’s Beige Book report of economic conditions.
  • Wednesday-Thursday overnight: Chinese gross domestic product and European Central Bank meeting. Currencies and commodities might be active.
  • Thursday: Monthly retail sales, jobless claims, housing-market index.
  • Friday: Housing starts, consumer sentiment.
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