TECHNOLOGY IS WEEK'S STRONGEST SECTOR AND HITS NEW HIGH -- SO DOES THE NASDAQ 100 -- MICROSOFT WAS ONE OF THE BIG REASONS WHY -- RUSSELL 2000 ISHARES BOUNCE OFF 50-DAY AVERAGE -- SMALL CAPS SHOULD BENEFIT FROM TAX CUT
TECHNOLOGY HAS A STRONG WEEK... After leading the market higher for most of the year, technology stocks saw some profit-taking near the end of November, and have lagged behind the rest of the market since then. This week, however, technology was the market's strongest sector. And that was enough to push the Technology Sector SPDR (XLK) into record territory on Friday (see Chart 1). The XLK/SPX relative strength ratio (top of chart) is still lower than it was a month ago. But is recovering some lost ground. It remains to be seen, however, if the expected passage of the tax reform bill this coming week will keep money flowing into sectors that stand to gain the most from a tax cut. That includes financials, retailers, telecom, and transports. As well as small cap stocks. The strong technology sector helped push the Nasdaq market into record territory on Friday.
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Chart 1
NASDAQ AND MICROSOFT HIT NEW RECORDS... The Nasdaq finally joined the Dow and S&P 500 in record territory on Friday. Chart 2 shows the PowerShares QQQ exceeding its November peak at week's end, and in heavy trading. The QQQ is based on the Nasdaq 100 index which includes the 100 largest non-financial stocks. Most of them are in technology. One of the biggest contributors to that gain was Microsoft. Chart 3 shows Microsoft (MSFT) gaining more than 2% on Friday to reach a new record. It did so on the heaviest trading in two months. It's always encouraging to see all of the major stock indexes hitting new highs together. One stock index that didn't hit a new high was the Russell 2000 Small Cap Index. But it may be heading in that direction.
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Chart 2
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Chart 3
RUSSELL 2000 ISHARES BOUNCE OFF 50-DAY AVERAGE... News on Friday that passage of the tax reform package might be imminent gave a big lift to stocks. Small caps got the biggest lift. Chart 4 shows the Russell 2000 iShares (IWM) bouncing impressively off its 50-day moving average (blue arrow). And on rising volume. That makes sense considering that domestically-oriented small cap stocks stand to gain more from a tax cut than larger multinational stocks. Small stocks, however, have been lagging behind over the past two months. That can be seen by the IWM/SPX ratio on top of Chart 4. But that may not last for long. Financials make up the biggest part of the Russell 2000 (18%). And financials have been market leaders on hopes for tax reform. The 60-day Correlation Coefficient between the IWM and the Financial Sector SPDR (XLF) is a relatively high figure of .71 (bottom of chart). That means they usually trend in the same direction. Two other groups with high correlations with the IWM are consumer discretionary (.70) and industrials (.60). Those two economically-sensitive sectors have been also been market leaders. That may carry good news for small cap stocks, especially if the tax package passes this coming week as expected.
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Chart 4
RISING COPPER PRICE GIVES BIG BOOST TO FREEPORT MCMORAN... Industrial metals have been the strongest commodity group this year. That includes copper which has gained 25% during 2017. After hitting a three-year high during October, the base metal pulled back near chart support along its September low (Chart 5). A rally this past week, however, pushed it back above its 50-day moving average (blue circle). That bullish action helped make Freeport McMoran (FCX) the week's biggest percentage gainer in the materials sector. The daily bars in Chart 6 show the copper producer rising above its summer high to put it right up against its early 2017 peak at 17 (and on rising volume). A close above that chart barrier (which appears likely) would put the stock's price at the highest level in more than two years. Its relative strength ratio (top of Chart 6) is nearing an upside breakout of its own.
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Chart 5
