Markets Reach New highs in the Face of Continuing Risks

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Market Moves

The markets charged higher amidst positive news from the ADP Employment report and the speech President Trump delivered on the state of the Iran conflict. The S&P 500 index (SPX) closed higher by over 0.5%. The Dow Jones Industrial Index (DJI) and the Nasdaq 100 index (NDX) both responded similarly, while the Russell 2000 (RUT) index closed 0.3% higher. Gold and bond prices dropped by 1%, and oil prices dropped 4%, all reflecting the market’s expectation that risks from the Middle East conflict are significantly reduced.

However, professional traders generally think that some level of risk still remains. The chart below, captured 15 minutes before market close, shows how the SPX broke into new-high territory, while the Volatility Index (VIX) has yet to break below its three-month low, despite the fact that the market has made 10 new highs since Thanksgiving.

This doesn’t imply that a market crash is imminent because temporary periods of elevated risk pricing occur often in bull markets. It should be noted, however, that a month-long sustained period of risk pricing has occurred in front of every major market correction over the past century. Pondering that possibility gives chart watchers the eerie feeling that investors may be moving to the tune of a Lady Gaga market – ignoring the risks and continuing to dance anyway.

Inside the Technology Sector

As pointed out in yesterday’s Chart Advisor, the technology sector has outperformed its peers yet again to start the year. Today’s market moves reiterated this observation yet again.

The chart below compares the top nine holdings within State Street’s sector index ETF for technology (XLK). The chart tops out with NVIDIA Corporation (NVDA), Apple, Inc. (AAPL), Adobe, Inc. (ADBE), and, Inc. (CRM). These four stocks trade above the index’s return for the last quarter, while the remaining stocks, Intel Corporation (INTC), Microsoft Corporation (MSFT), Mastercard Incorporated (MA), Visa, Inc. (V), and Cisco Systems, Inc. (CSCO) appear to lag the average.

NVIDIA Shares Continue to Rise

Surprisingly enough, the top performer within the technology sector is not Apple. NVIDIA shares have outpaced the iPhone giant over the past three months – no mean feat since Apple’s share price has increased by over 35%. Even though NVIDIA shares are trading with a price-earnings ratio of over 67 (more than three times higher than the S&P 500 average), at least three reputable analysts have price targets north of $250 per share. 

The chart below shows that NVIDIA shares broke above their first Fibonacci-based price target. The next one is as high as $290. It may seem crazy to some analysts for shares to go that high. However, if the technology sector continues higher, NVIDIA shares are likely to continue higher still.

The Bottom Line

Markets moved to new highs yet again, despite the swirl of risks in many areas. The Volatility Index pricing reflects the recognition of such risks, but investors seem willing to dance along to an optimistic tune nonetheless. The technology sector outpaces all others, with NVIDIA shares leading the way.

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Source: Investopedia

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