With four of the Magnificent 7s reporting earnings the next two days, big tech is front and center.
I’m talking about the largest and most important companies in the world.
These mega cap growth stocks have grown so massive that they do most of the driving when it comes to the performance of the major averages.
The S&P 500 won’t be in a bull market if too many of the stocks in the trillion-dollar club are in downtrends. It’s just math.
Alternatively, the S&P is going to look great if Microsoft, Meta, and friends are in uptrends… even if market internals are weak beneath the surface.
The bottom line is that when it comes to the US stock market, these are the heavyweights. You can’t have a bull market without them.
The Mag 7s currently make up over 30% of the S&P 500 and more than 40% of the Nasdaq 100.
The three largest - Apple, Microsoft, and Nvidia - are all tech stocks. So it stands to reason that wherever tech goes, the indexes will go.
And due to the risk-on nature of the sector, it also makes sense that tech stocks will outperform in an environment where they’re trending higher. This has been true for a long time now.
This chart illustrates just how strong the relationship is between the absolute and relative trends in XLK:
I think these chart patterns are as important as anything when it comes to the direction of the overall market and major averages.
If tech fails this topping formation relative to the S&P 500 and reasserts its old leadership, it’s right back to rally mode. We’ll be talking about all-time highs again soon. It’s that simple.
Now this isn’t to say that the indexes can’t keep rising over shorter timeframes without tech leadership. The positive correlation does dislocate here and there. But it is rare, and it is simply the lower probability outcome.
Some clean and clear leadership from tech would be an easy signal that the bulls have regained control of this market.
I think the charts are set up perfectly for it. Tech has already been leading since stocks bottomed earlier this month.
And just look at the failed breaks materializing in XLK and XLK/SPY. If we’re back above those old lows, these patterns have scoop ‘n score written all over them.
We also have potential catalysts coming that can trigger a big reaction from the tech sector off these key levels.
Microsoft reports this afternoon, and Apple reports tomorrow.
