After several false starts on Thursday, bulls finally got a conquest on the breakout for the S&P 500 (SPX) above 4,150, states Jon Markman, editor of Strategic Advantage.

The benchmark index ended the session at 4,176, a gain of 1.8% that made up losses in the prior two sessions.

The strength came mainly from beaten-down technology stocks. The sector was stronger despite the resignation of Meta Platforms’ chief financial officer and earnings warning from Microsoft. After weak starts, both stocks surprised skeptical onlookers by managing to finish up the session. Investors are wise to make note of these swings. Sentiment is changing for the better, at least for now. I have been expecting bulls to push through 4,150 and ultimately make a run toward the 50-day moving average for the benchmark S&P 500. At this stage, that marker is at 4,256.

Keep in mind, that we are still mired in a bearish trend. All of the major moving averages are overhead and pointing lower. Bears are likely conceding the current rally in order to get safer entry points for new short positions. Trading is tactical. Living to fight another day, and from a better vantage point, is the art of war. Critical support is now 4,070 on a closing basis.

SA TradeView: Our ProShares UltraShort S&P 500 (SDS) position fell 3.8% on Thursday to $42.25. Target is $45.30; stop is $42.00 (after 11 am ET).

The Upshot

The Dow (^DJI) rose by 1.3% to 33,248.28 and the Nasdaq (NDX) was 2.7% higher at 12,316.90. Consumer discretionary and materials led the gainers, with energy the only sector in the red. The US 10-year yield fell 2.2 basis points to 2.91%. West Texas Intermediate crude oil futures were up by $2.44 to $117.70 a barrel.

Breadth favored advancers seven-one, and there were 98 new highs vs. 126 new lows. Big caps on the new high list included Marathon Petroleum (MPC), Phillips 66 (PSX), Cenovus Energy (CVE), Teck Resources (TECK), and Pembina Pipeline (PBA). Initial jobless claims decreased by 11,000 to 200,000 in the week ended May 28, lowering the four-week moving average for the first time in nearly two months. Jefferies economists said the jobless claims data pointed to strong labor demand, low layoff activity, and tight conditions.

In company news, Generac Holdings (GNRC) subsidiary Generac Grid Services said Thursday it will expand its collaboration with RWE, a German utility, with the launch of two more products for the energy market in 2022. Shares of Generac rose 10.2%, the top gainer on the S&P 500.

Semiconductor Stocks Are Acting Chipper

The tide in the stock market decline might be turning, but not for the reasons you will read in the financial news. Sentiment is changing for the better. Technology stocks surged on Friday. The reported catalyst was a monthly decline in an obscure inflation metric. Long-time traders understand that the market is finally looking past bad news. It is a good time to take a fresh look at one of our all-time favorites, which is usually too expensive to recommend: Cadence Design Systems (CDNS).

Most investors believe stock prices are some weird mix of macroeconomics, profitability, and Federal Reserve policy. That is partly true. However, getting economics right is a coin flip. So many variables are at work simultaneously. Profitability can also be tough. Sometimes investors are willing to pay dearly for earnings, and other times not so much. Then there is the Fed. Eight months ago, the Fed was committed to rates near zero until 2023. Today the central bank is raising rates furiously.

The part many investors miss, to their detriment, is sentiment. The way a consensus of traders “feel” about stocks is more important than any other factor. This is why stock indexes can rise when interest rates are advancing, or when earnings are collapsing.

One of the greatest bull markets began in 1982 when rates were rising to head off inflation. Likewise, stocks rocketed higher in 2020 when earnings were falling off a cliff.

Jump forward to last week.

Semiconductor giant Broadcom (AVGO) rallied following news of its proposed acquisition of VMWare (VMW), an enterprise software company. Then, a few days later Nvidia (NVDA) reversed an early decline despite a shortfall in year=end financial guidance. Two important stocks rallied in the face of decidedly bad news. Shifts in sentiment precede big price swings.

Tech stocks have been mostly in a funk since January due to concerns over valuations and rising interest rates. Many shares have been cut in half as the tech-heavy Nasdaq fell by 30%. The carnage for newer tech companies bereft of earnings have been more extreme. An index of special-purpose acquisitions companies, the pinnacle of the recent hype era is down 60%. A report Friday in the Wall Street Journal warns that many will go bust.

Cadence Design Systems sits comfortably at the other end of the spectrum. Although shares are down 16% year-to-date, this fast-growing company is certain to be among the first to rekindle investor favor. The weakness is that 2022 is a buying opportunity, especially now that sentiment for semiconductors is improving.

The San Jose, California-based firm makes software used by the semiconductor industry to design microprocessors and helps with software integration. Cadence is an extremely profitable business from the ground up. Current gross margins are 90%. Operating margins are 28%. And free cash flow is up 77% since 2020.

The strength for Broadcom and Nvidia means investors are now betting that the worst of the semiconductor downdraft is over. Cadence appears to be a steal.

Learn more about Jon Markman here...