Bulls Are Entrenching Themselves

Hey trader,

Last week was another win for the bulls. The Nasdaq outperformed for the fifth week in a row.

Equal-weight tech also hit a new all-time high. That cemented tech as the sector with the strongest momentum in the near term.

The average stock is getting left behind. Still, the stocks and sectors that matter the most continue to do the right things.

That gap carries extra weight right now. Q4 is in full swing, and the calendar is working against any money manager who’s trailing the benchmark.

Managers in that spot face a lot of pressure to chase performance into year-end. That chase could set up a final blowoff before volatility returns with a vengeance.

Bears love to point at narrow breadth as proof the rally is fragile. The equal-weight tech breakout puts a serious dent in that argument.

The other piece of the puzzle sits in the energy patch. A pullback there could hand the average stock the relief it’s been waiting for.

The sector leaderboard comes first. It hasn’t moved an inch in a week.

Equal-Weight Tech Is Broadening the Rally

Interestingly, the scoreboard from the previous week is completely unchanged. Technology is leading across the 1-week, 30-day, and 1-year timeframes.

Energy is still the leader year-to-date.

A leaderboard that refuses to budge tells me the big money isn’t in a hurry to rotate out of tech. Institutions are sticking with the sector that keeps delivering.

Now, I’m going to share another chart that’s going to upset the bears. Here’s equal-weight tech at a new all-time high.

The standard tech sector fund weights each company by its size. A few mega-caps end up driving most of its moves.

Equal-weight tech gives every company the same slice. That makes it a much cleaner read on how the typical tech stock is holding up.

Market breadth has been narrow. This breakout in equal-weight tech signals that a massive broadening is on the verge of taking place.

Granted, this is coming from a sector that’s already been leading. It still contradicts the narrative that only a handful of tech names are doing all the work.

Think of it like a basketball team. A team that only scores through its two stars is one bad night away from losing.

Tech’s bench is starting to put up points now. That makes the whole sector a lot harder to beat.

The equal-weight tech breakout also plays right into the year-end chase. Managers who need to catch up don’t have to cram into the same few mega-caps anymore.

Strength in equal-weight tech gives them more doors to walk through. That kind of buying can keep momentum going longer than the bears expect.

Energy Holds the Key for Everyone Else

Equal-weight tech shows the rally is spreading inside the leading sector. The average stock outside of tech needs help from energy to join in.

I still wouldn’t mind seeing the energy sector come down some. Crude oil hit its low at the end of the week.

It bounced into the close after a negative geopolitical headline. I’m watching whether that headline-driven bounce holds this week.

Crude is one of the biggest inputs behind inflation. When oil climbs, inflation pressure builds and bond yields tend to follow it higher.

A short squeeze in bonds would flip that dynamic. Traders betting against bonds would get forced to buy back their positions in a hurry.

Any drops in energy from here could kick off that chain reaction. I’d expect it to play out in three steps:

• Crude loses steam, which takes some heat off inflation.
• Bond shorts scramble to cover, pushing bond prices up and yields down.
• Lower yields ease borrowing costs and set up a much-needed relief rally for the average stock.

The average stock tends to be more sensitive to rates than the mega-caps are. Smaller companies lean harder on borrowing, so a drop in yields gives them room to breathe.

Energy has to cooperate for any of this to happen. If crude grinds higher instead, the relief rally for the average stock gets pushed further down the road.

That’s where the volatility risk lives. Equal-weight tech proves the heavy lifting is spreading out within tech, but one sector carrying the market into year-end leaves room for a sharp shakeout.

I’d treat a shakeout like that as an opportunity rather than a reason to panic. Pullbacks inside a bull market are normal, and they’re often how the next leg higher gets built.

Let me frame it this way. Tech already pioneered a renewed bull run at the index level.

Now it’s up to the rest of the market to determine whether it’s sustainable in time.

Keep tech at the center of your watchlist into year-end. Watch equal-weight tech for confirmation that the broadening keeps going.

Keep one eye on crude oil, too. A pullback in energy would be the green light for the rest of the market to start catching up.

Talk soon,
Gianni Di Poce