The market sits in a chop zone, and this week could break it out. The key stock to watch is Nvidia (NVDA), the biggest stock in the world, breaking to all-time new highs. This has been a technology-led rally, and now the largest stock in the tech sector is hitting new highs. The question: will the rest of the market climb on its back, or will the smaller stocks fall further behind the leaders? For now, if one stock keeps the market within reach of new highs, it is Nvidia (NVDA).
Broadcom (AVGO) has not recovered. Micron (MU) was expected to join the rally but has stayed flat since earnings. Technology is what matters because it leads.
September was a stealth bear market
October is the most volatile month of the year, and it follows a down September. September ran true to form as the worst month - 10 of 11 sectors finished lower. It was a stealth bear market hidden under the surface of the major averages. The average S&P 500 stock sits 14% below its all-time high. Market breadth has been bad.
The conundrum heading into the week: do beaten-down staples like Pepsi (PEP) and Constellation Brands (STZ), both reporting, give a small lift and spark a relief rally in beaten-down names on top of tech? Or does tech stumble and fall back to the pack with everyone else? It is an intriguing setup going into earnings season.
There is little economic data this week except the Fed minutes, which carry little weight. The market already knows what the Fed is doing. The problem is the lack of forward guidance, which has left markets guessing and made them very sensitive to every data point.
A K-shaped market
This is a K-shaped market to match a K-shaped economy. At the top of the K are the Magnificent 7 names minus Tesla (TSLA). Microsoft (MSFT) is on the cusp of breaking out of a range and running back toward all-time highs. Meta (META) came back. Amazon (AMZN) and Google (GOOGL) have been treading water near their 200-day moving average and are just starting to come back to life. Fundamentally, Google (GOOGL) is the one stock that should hold a slow, steady uptrend.
These Magnificent 7 names, the highest-weighted stocks in the world, are doing all the work. On the lower part of the K sit nine to ten other sectors just treading water. Equal-weight has now logged its seventh straight week of losses, something seen only three times in history. Semiconductors, by contrast, are up five weeks in a row.
Financials are the key - and they are breaking down
Financials matter most now, and they are breaking down. Earnings kick off October 13th. JP Morgan (JPM) and Citi (C) look good, but Goldman Sachs (GS) and Morgan Stanley (MS) have already broken down.
Why the breakdown? The IPO market has stalled - deals are being put on hold even with the market at all-time highs. There is heavy pushback against AI-related names like Anthropic and ChatGPT builders. Heading into the midterm election cycle, the one thing both parties agree on is slowing the build-out, a "not in my neighborhood" stance. That topic is front and center, the IPO market is not showing up, and higher rates are hurting financials too.
If a successful Anthropic IPO comes and SpaceX keeps doing well, the market could open up. For now, financials are beaten down and insurance stocks gave back all their gains. If there is no rally into and out of earnings next week, that is a concern. You can have bull markets without financials - 2020 and 2023 both had tech lead while financials lagged - but a strong bull case needs them on board. They need to join the party or at least come back to it.
Earnings as the one saving grace
Earnings have kept this market afloat. Strip out the political angst, market sentiment (usually a contrarian signal), rising inflation, and the cost of gas, and earnings are the one saving grace. The hope is financials lead and guide solidly, showing it is not as bad as people claim.
On X factors: the longer the war goes on, the bigger the risk. If oil stays stable at $90 heading into winter, it could cause problems. But this is a bifurcated market, and tech earnings are so strong it is hard to bet against them. When tech breaks out to new highs, the bearish case goes out the window. Tech can lead without the other stocks, and that will be the story into the second half of October.
S&P 500 and Nvidia levels
The S&P 500 range keeps getting narrower. Downside support sits at 7657, the rising 50-day moving average, which was tested last week and held well to end September. October started well. The level to close above for a new high is 7798. Closing at new highs matters.
For Nvidia (NVDA), a close at 240 would turn old resistance around 235 into support, and the narrative shifts to fear of missing out. Nvidia (NVDA) and Micron (MU) have both gone sideways for a while, which is not a sign of a top - even after phenomenal earnings. These are sleeping giants with great earnings, strong projected growth, and valuations that are historically cheap. The advice: ignore the noise, focus on earnings and trends. The biggest stocks will lead the market higher.
Beneath the surface, staples look terrible. Pepsi (PEP) and Constellation Brands (STZ) enter earnings this week at 52-week lows. General Mills (GIS) hit a 17-year low last week. Nike (NKE) hit a 13-year low. Lululemon (LULU) is broken. Many long-reliable big names are no longer delivering. It is tech and more tech.
