Technology bulls rampaged Friday as another big tech company reported solid financial results. Frenzied short covering by bears ensued, states Jon Markman, editor of Strategic Advantage.
The Nasdaq 100 soared to 13,259, a gain of 2.1%. Bulls can thank Apple (AAPL). Executives at the iPhone maker reported Thursday night that second-quarter profits reached $24.2 billion. More importantly, they forecast a stronger-than-expected second half as sales growth in Asia rebounds.
Bears were predicting the opposite. Apple shares rallied 4.7% to the best closing level since August 2022. Stick a pin in that. The bears fear higher global interest rates will send the worldwide economy into a nasty recession. And there has been ample evidence that demand is slowing for cyclical materials such as energy, metals, and even commodity semiconductors. Prices are falling.
Unfortunately for bears, price deflation for commodities benefits the world’s biggest tech companies. From Meta Platforms (META) and Microsoft (MSFT) to Apple, better profit margins sent quarterly financial results well above forecast. Subsequently, bears are being forced to cover short positions in big tech.
The next phase of this process is more feverish forced buying for heavily shorted shares of smaller tech firms. This panic should send the benchmark NDX push to 13,750, a test of the August 22 highs. The first support level for the NDX is now 13,020. Continue to buy pullbacks.
The NDX loop: Members bought the ProShares Ultra QQQ (QLD) on May second at $48.20. The 2X leveraged index fund closed Friday at $49.75, up 3.2% from the entry level....Set up to sell half of the position at $53.80 LMT GTC, and half at $58.20 LMT GTC. Set a new trailing stop loss at $45.20 STP.
Behind the headlines: The Dow rose 1.7% to 33,674.4. All sectors posted gains, led by energy and technology. For the week, the Dow and the S&P 500 (SPX) fell 1.3% and 0.8%, respectively, while the Nasdaq ticked 0.1% higher. Breadth favored advancers seven-two. There were 174 new highs vs 159 new lows. The selloff in US bank shares is threatening to push them below a technical threshold that could signal more pain ahead for the broader stock market.
With the collapse of First Republic Bank worsening fears about the solvency of regional lenders, investors have pummeled financial stocks, leaving the S&P 500 financials index on the verge of falling back below its 2007 peak. For perspective, after the 2008 credit crash, it took over a decade for that gauge to recover the ground it lost.
The financials index has been above the 2007 high since January 2021. If were to fall through that barrier now, it would be an ominous signal for the broader stock market, said hedge-fund manager Jim Roppel, founder of Roppel Capital Management.
Why? Because it could put further pressure on banks to conserve capital and cut back on lending, adding drag to an economy already at risk of a recession after the Federal Reserve’s steep interest-rate increases over the past 14 months.
“You can’t have a bull market if bank stocks are falling,” said Roppel, who’s a long-term bull but currently is mostly in cash with the rest in defensive plays like gold and gold miners. “It’s like if an Olympic athlete had cinder blocks around their legs.” –Bloomberg