Is the Tech Rally Really Over?

Plus, key SPX levels to watch as the index turns volatile

Senior Vice President of Research
Jan 10, 2022 at 9:00 AM
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As investors fret about Covid-19’s impact on the economy going forward, all eyes will be on the Federal Reserve…With the prospect of bond purchases by the Fed going away and the first rate hike in years, will this reverse the path of the stock market, or slow the well-above-average returns posted in both 2020 and 2021?‘

“…the market has gone through the reality of emerging variant risks and the Fed becoming less accommodative in the future…This risk re-assessment pushed the SPX out of an orderly pattern of highs and lows in place from November 2020 through September 2021. But it is quite possible that a new channel is in place, with the bottom rail of that 2020-2021 channel acting as resistance instead of support, and a new lower rail connecting the September and December lows. If such a channel persists like most of last year, bulls would welcome this.”

 - Monday Morning Outlook, Jan. 3, 2022

After reflecting on the flip of the calendar year from 2021 to 2022, a theme was that, despite the new year, the same uncertainties persist. This is especially as they relate to how the Federal Reserve will manage winding down its stimulus programs, even as Covid-19 anxieties linger

Moreover, from a broad market equity perspective, technical signals in place in 2021 carried over into this year, as evident by short-term bearish three-day candlestick patterns on the S&P 500 Index (SPX – 4,677.03) that emerged multiple times last year. This includes the year-end, three-day pattern that arguably signaled a poor start for equities in the start of the new year.

Looking ahead to next week and the short-term, the biggest risk for bulls is the Tuesday through Thursday daily candles on the SPX, as they look similar to three-day patterns that preceded short-term market declines last year. In other words, the doji-like days on Tuesday and Wednesday, where the open and close are the same or about the same, typically hints of a reversal. This was followed by Thursday’s bearish outside day and looks most like the early-November three-day pattern.”

          - Monday Morning Outlook, Jan. 3, 2022

I also observed that a trendline connecting higher lows, which acted as a SPX support area in 2020-2021, may remain in play this year, with the caveat being it could serve as resistance this time around. Specifically, the bottom rail of a channel from late 2020 through much of 2021 may become the top rail of a potential new bullish channel. Such a scenario would still put pressure on the bears, since this rail is rising.

And if last week was indicative of how 2022 could play out, it pretty much followed the playbook that I outlined in last week’s Monday Morning Outlook. Stocks sold off as the Fed came into focus, following release of the December Federal Open Market Committee (FOMC) meeting minutes, and the SPX lost ground after the bottom rail of an old channel marked last week’s peak.

The SPX closed below its November closing high but remains above a trendline connecting higher lows since late September/early October. This trendline extends from 4,625 on Monday to 4,645 at week’s end. Plus, the SPX held above its 50-day moving average at 4,675, while the 80-day moving average marked lows in November and December -- and sits just below the round 4,600 century mark at 4,582.

With the SPX in negative territory, a first level of short-term resistance is its 2021 close at 4,766.

mmo jan 7 chart 1

Federal Reserve officials are beginning to map out how and when they could shrink their $8.76 trillion portfolio of Treasury and mortgage securities, which more than doubled amid efforts to stabilize the economy over the past two years...the Fed could allow its holdings to shrink by allowing bonds to mature, or run off.  Fed Chairman Jerome Powell said last month that he and his colleagues hadn’t made any decisions on the matter…. But he hinted that the central bank wasn’t preparing to follow the path taken between 2014 and 2019.  Back then, the Fed kept the bond holdings steady for three years and then gradually began shrinking the portfolio.”

          The Wall Street Journal, Jan. 4, 2022

Per the excerpt above, the minutes of the mid-December FOMC meeting were released Wednesday, and while I personally didn’t see anything in the minutes that strayed too from the Fed’s statement and Chairman Powell’s press conference last month, market participants sold stocks and bonds on the news.

For example, the yield on the 10-year Treasury note spiked to 1.77%, its highest level since the first quarter of 2020. Moreover, swaps dealers increased their expectations for rate hikes to begin in March. Increasing interest rates sparked a huge rotation out of technology shares and into financial and energy stocks. With technology being such a heavy weighting relative to sectors that rallied, equities slid but there was minimal technical damage. 

Wall Street pros are doubling down on a big stock call for 2022: The leadership of high-growth tech darlings is no more... Wells Fargo strategists see more bad news in store for tech and expensive growth stocks this year with room for real rates to rise another 25 to 50 basis points…The flipside is cyclical stocks such as big banks, industrial and transport firms are in line for gains.”

Bloomberg, Jan. 5, 2022

Tech’s Tough Start… Headwinds in 2022

Tech Wreck

                   - CNBC Television headlines, Jan. 6, 2022

And this came as Wall Street made their projections for 2022, where a consensus is developing that amid muted broad market stock gains, technology shares will take a backseat to cyclical stocks.

With cyclicals displaying strong price action, the positive sentiment is not as big of a concern relative to if this group was selling off during the past few months and to begin the year. A question, however, is whether tech is really dead as many strategists believe in their 2022 predictions?

Negative sentiment on technology stocks, along with the reaction to the FOMC minutes, has not been supportive of the technology group. But, per the chart below, large-cap technology stocks, as depicted by the Nasdaq-100 Index (NDX – 15,592.187), is not yet a broken trade for bulls from a technical perspective.

The pullback last week simply pushed this index down to its December lows, which occurred prior to and after the December FOMC meeting. Furthermore, unlike the SPX, the NDX has been moving higher within a bullish channel connecting higher highs and higher lows for over a year (since September 2020). The bottom rail of this channel extends from 15,330 to 15,387 through next week, or approximately 1.5% below the Friday NDX close of 15,992.

A weekly close below the bottom rail of this channel would put the tech trade more at risk, but there is also support from the round 15,000-milllenium mark, which coincidentally is in the vicinity of its 200-day moving average. These are potential levels to use before even considering going “all-in” on the “tech is dead” mantra. Simply put, it is too early to make such a call and some of the price action in recent days could be more about investors reacting to these predictions than the actual risks of higher rates to this group.

mmo jan 7 chart 2



Finally, note my observation on Twitter Thursday morning above, since the CBOE Market Volatility Index (VIX—18.76) may continue to offer clues to the immediate direction of stocks.

The pre-Christmas break below a trendline connecting higher lows in the VIX from November through mid-December, foreshadowed a rally through year end. Thursday morning’s peak occurred at this trendline, and could be implying last week’s decline is temporary and, as such, investors should error on the side of a rally in the short term. Beware, however, that this trendline continues to move higher as days pass, so a move above it or last week’s high may be worth tuning into for indications of higher volatility and lower stock prices. Additionally, watch for volatility buyers to come in between the 17.22 level, the VIX’s 2021 close, and 17.60, which is one-half the VIX’s intraday high in December.  

mmo jan 7 chart 3

Todd Salamone is Schaeffer's Senior V.P. of Research

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