Equities witnessed a slight pullback from December highs, heralding what seemed to be a lull. However, the markets are now showing signs of a bullish reversal, led by two sectors – semiconductors and cybersecurity.
These two sectors proved instrumental in propelling the equity markets upwards in October, effectively laying the foundation for the indices S&P 500 (SPY) and Nasdaq 100 (QQQ). The momentum that these stalwarts seemed to have lost when the spotlight shifted to the cryptocurrency sector in November is now making a promising comeback.
As we analyze the leading stocks within these two sectors and their breakout performance on Monday (8 January), a strong case emerges. This signals that the equity markets are poised to ascend, potentially soaring to new all-time highs for the SPY and QQQ.
Semiconductors: A Resilient Force
Delving into the semiconductor sector, a standout performance has undoubtedly been delivered by NVIDIA (NVDA). While the broader market oscillated, NVDA charted an unwavering upward trajectory, having experienced a substantial surge in January 2023.
With earnings outperforming expectations for four consecutive quarters, NVDA’s robustness is undeniable. The stock has been consolidating since its impressive earnings in August, and on Monday, it decisively broke out from this four-month base, fueled by above-average trading volume. The path of least resistance points decisively upwards.
Daily Chart: NVDA
On the same day NVDA charted its breakout, Marvell Technology (MRVL) also soared on sturdy trading volume. MRVL, which leaped by over 30% after beating earnings in May, had been building a base from August to December before its recent breakout.
Daily Chart: MRVL
Advanced Micro Devices (AMD) has been another luminary in the semiconductor space. While most growth stocks floundered below their 10 and 20-day moving averages during the recent market pullback, AMD soared above both benchmarks.
AMD initially piqued interest at the start of November, following its earnings triumph and the breach above downtrend resistance. Notably, this victory sparked a broader market rally. The company’s launch of an AI chip to rival NVIDIA in early December further fueled its ascent. Since then, the stock has been steadfastly climbing, and I have personally initiated a long position in AMD at $138.47.
Daily Chart: AMD
Assessing the semiconductors ETF (SMH) versus the SPY ratio, a significant breakout was witnessed, originating from a substantial base in May. Since then, semiconductors have consistently outperformed the SPY.
Weekly Chart: Ratio of SMH vs SPY
Turning to the cybersecurity sector, CrowdStrike (CRWD) stands out as one of the few stocks currently trading above its 10 and 20-day moving averages, signifying substantial strength. Stocks maintaining position above these benchmarks during a market downturn are poised to outshine the broad market in the near future. Notably, I ventured into CRWD at $258 as it broke out on 8 January.
Daily Chart: CRWD
Additionally, Zscaler (ZS) within the cybersecurity domain is striving to breach its 10 and 20-day moving averages. Riding on the momentum of three consecutive earnings wins, ZS has been steadily ascending.
Daily Chart: ZS
Datadog (DDOG), akin to ZS, is also maneuvering to surpass its 10 and 20-day moving averages. The stock registered a vigorous breakout on substantial volume after besting earnings in November. It would be immensely beneficial for the sector if both DDOG and ZS manage to reclaim ground above their 10 and 20-day moving averages.
Daily Chart: DDOG
Scrutinizing the cybersecurity ETF (HACK) against the SPY ratio, it is apparent that the ratio underwent a substantial buildup from October 2022 to September 2023 before surging higher. This signals a promising phase of cybersecurity stock superiority over the broad market.
Weekly Chart: Ratio of HACK vs SPY
Conclusion: A New Dawn
The recent minor setback in equities from their December peak hinted at a pause. January also commenced on a sluggish note for stocks until the buoyant recovery seen on 8 January in leading stocks and indices.
Semiconductors and cybersecurity are the two sectors that have captured my attention. Both propelled the broader market rally in October, moderated their pace, and now, it seems that the upward momentum is resurfacing.
Following the minor equity retreat from late December to early January, the risk-reward outlook appears enticing for tapping into these sectors. Personally, I hold positions in AMD and CRWD, with plans to expand exposure to these sectors.
