According to Kevin Dempter, a technical analyst at Renaissance Macro Research, the recent bounce in U.S. equities, specifically in technology stocks, suggests a breakout that could lead to further strength heading into the end of the year. Despite a 12% correction from the July highs, the tech sector has rebounded impressively with a 10% rally from its lows, surpassing key resistance levels.
Dempter points out that the Technology Select SPDR ETF XLK is breaking out above a downtrend in what experts refer to as a bullish flag pattern. Additionally, the relative price is making new highs, further suggesting the upside potential for this sector.
However, Dempter cautions that the tech sector is currently overbought and may experience some “tactical weakness” in the near term. Nevertheless, the key observation is that tech does not resemble a top and appears poised for further upside.
The Nasdaq Composite COMP index recently achieved its ninth consecutive gain, while the S&P 500 SPX rose for an eighth straight day. On the other hand, the Dow Jones Industrial Average DJIA ended its seven-day winning streak on Wednesday.
Moving forward, RenMac advises investors to focus on large-cap tech shares for long positions. However, they also recommend exploring opportunities beyond the dominant “Magnificent Seven” group of ultra-large cap stocks that have been leading the 2023 stock-market rally.
Notably, short interest in the Magnificent Seven has hit a record low, indicating that bears are hesitant to bet against these companies. According to data from Bank of America’s quantitative-equity strategists, short interest in this group, which includes seven out of the eight most valuable publicly traded U.S. companies, currently stands at around 1% of the group’s aggregate market capitalization.
For more information, read Nobody on Wall Street wants to bet against the ‘Magnificent Seven’.