If you want to know where the broad market is going, you have to keep an eye on tech stocks.
Wednesday should be relatively quiet, given the timing of the Fourth of July this year. For that matter, we might see rather muted activity this whole week. But investors should continue to focus on the action in tech stocks.
The XLK ETF, which tracks the S&P 500 tech sector, underperformed yet again on Monday's short session. It has broken and remained below its 50-day moving average, which acted as a supportive trend line from November. And the ETF made a key "lower low" on Monday, meaning that it slipped below its prior intraday low. This is the first "lower high"/"lower low" sequence we've seen since November.
Unless this group can see an immediate and strong bounce, the action is going to be a big yellow flag for the broader market as we move through the rest of the summer. Tech has obviously been an important leadership group this year, so if it continues to decline, we believe it's going to be negative for the broader market as well — eventually.
That said, we do have to admit that the S&P 500 is holding up very well so far. Despite the 5.4 percent decline in the XLK, the SPX remains only 1 percent below its all-time highs. It is also holding above its own 50-day moving average.
The S&P did break below that indicator (which, as a reminder, is simply an average of the 50 most recent closes) a couple of times in April and once in May. However, those "breaks" were very slight ones. So while we could see another break below the moving average, I'm going to have to see a substantial one before I become concerned about this broader index.
Finally, it's worth mentioning that the 50-day moving average has been key support for the Nasdaq composite in recent months as well, and the index did break below that line on Monday. It is only a very slight break so far, but given how the larger-cap Nasdaq 100 Index has already broken its own 50-day average in a significant manner, it raises some concerns.