Tech Leads Melt-Up

With the exception of the Dow Jones Industrial Average, the major U.S. stock indexes all had yet another highly positive day on Wednesday. Both the S&P 500 and tech-heavy Nasdaq Composite were able to hit new record highs. Tech stocks overall were especially strong, despite an earlier announcement by the U.S. Department of Justice warning of an impending antitrust review of major tech companies.

Only the Dow fell modestly, failing to participate in the big rally, due in large part to losses suffered by key Dow components The Boeing Company (BA) and Caterpillar Inc. (CAT). Shares of Boeing dropped more than 3% after the company reported its worst ever loss last quarter as its embattled 737 Max jet remained grounded. Boeing additionally warned that it could soon suspend production of the jet. For its part, Caterpillar lost more than 4% on Wednesday after its own earnings results missed forecasts for both revenue and earnings amid the ongoing U.S.-China trade war and rising costs.

While these losses weighed moderately on the Dow, both the S&P 500 and Nasdaq Composite made major breakouts. The S&P 500 chart, below, shows the benchmark index making a tentative breakout above a key consolidation pattern that we discussed here two days ago. Any further follow-through on this breakout could shoot for the first major upside target in uncharted territory around the 3,090 level, which is a key 161.8% Fibonacci extension level.

And just to show the leading strength of the tech side of the market, below is a chart of the Technology Select Sector SPDR Fund (XLK), which holds some of the largest technology players.

Like the overall market, XLK also hit a new all-time on Wednesday. But its rise year to date has been significantly more dramatic than the general large-cap market. Since the beginning of the year, XLK has shot up a whopping 36% (as of Wednesday’s market close), significantly better than the S&P 500’s still-impressive 22%.

Helping to drive the tech surge on Wednesday were hot semiconductor stocks (which we discussed here yesterday). The VanEck Vectors Semiconductor ETF (SMH) made a big move, to the tune of 2.66%, which is quite a substantial one-day move for an ETF.

We’ve noted recently that small-cap stocks have not been fully participating in the broader stock rally. Unlike its large-cap index siblings, the Russell 2000, which is the primary small-cap benchmark index, is currently far from a member of the All-Time High Club. Though the Russell 2000 is still well below its August record highs, we might have seen a bit of a catch-up attempt on Wednesday.

As shown on the chart, the small-cap index shot up 1.64% on Wednesday, dwarfing the moves of its large-cap brethren. In doing so, the Russell 2000 has also reached the top of a very large triangle pattern. With any confirmed upside breakout, the next major resistance target is around May’s 1,618-area high.

We’re now seeing big breakouts and new highs across equity markets. When markets go on these types of runs, momentum and feverishly bullish investor sentiment often continue to fuel the rally. Investors seem to keep finding more reasons to buy and not many reasons to sell.

You could argue that it’s time for a pullback, or that markets are way overbought, or that there are major risk factors on the horizon — all of which may be true. For now, though, it doesn’t appear that there are many barriers to substantially higher highs.

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