Market Fundamentals Remain Sound, But Keep an Eye on those Tech Stocks!

I’m a long-term investor at heart. So, I know that economic data and corporate earnings provide the real fundamental support during any lasting bull run. That doesn’t mean we can’t see swings of 10% to 15% or more as part of typical volatility. But that platform creates a firm base the markets can build on over time.

So where do things stand right now? Despite some concern over higher valuation multiples, earnings are supportive. Ninety-seven S&P 500 companies have reported so far this quarter, and on average, top-line sales have grown 6.7% while bottom-line earnings have risen 8.7%. Analysts expect that when all is said and done, growth for the quarter will be in the realm of 6%. That’s not bad at all!

As for the economy, we’re growing at a pace of about 2.5% to 3.1% for the third quarter. That’s not barn-burning growth. But it’s fast enough to keep corporate America on track and to push the Fed to hike interest rates again sooner rather than later. In other word, equity markets are enjoying a bowl of porridge that’s not too hot, and not too cold.

But as bullish as I am on the long-term outlook, I understand that short-term swings can be important to many traders. That brings me to the tech sector.

The Nasdaq has been this year’s biggest winner, up 32.4% overall. But a few of its biggest names started to underperform the S&P over the last month – Amazon.com (AMZN, Rated “C”) by 5.9%, Apple (AAPL , Rated “B”) by 4.9%, and Facebook (FB, Rated “A-”) by 3.3%, despite the PowerSshares QQQ Trust (QQQ, Rated “B+”) making higher highs.

And now, as you can see from the chart below, the QQQ has started to follow suit. Its RSI, which is used by short-term traders to detect trend changes, is starting to trend lower (highlighted by the red circle). That means upside conviction is starting to wane.

Plus, the two blue trend lines are converging. That’s another sign the upside move has lost momentum, and that we could move back to a range-bound trading environment … or even test the lower blue line.

If you’re primarily a longer-term investor, you don’t have to worry as much about this. But if you’re a more active trader … or have been waiting on the sidelines for a pull back while the market has kept running … you just may get your chance to dip your toes in soon. So, make sure you have your favorite list of BUY-graded stocks from Weiss Ratings at the ready!

Best,

Mandeep

Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.