Tech stocks could lead the S&P 500 to 4,000 before market pulls back, chart analysts say

Published Wed, Dec 23 20207:04 AM ESTUpdated Wed, Dec 23 20209:19 AM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Tech has been a source of strength in this week's choppy market, and big names could well take the market higher into the first quarter, chart analysts said. In the tug of war between cyclicals and growth, tech has been winning lately. The sector is the top performer this week, with financials the only other major S & P sector showing some strength. The S & P 500 is down 0.6% in the period, closing at 3,687 on Tuesday. Technical analysts say the glidepath for a short-term rally still looks clear, and tech could help lead the S & P 500 to the 4,000 area, before a market correction in the first quarter. "Mega cap growth had their consolidation. Those names were way overheated in September, and they consolidated nicely. They didn't collapse. They've just gone sideways," said Todd Sohn, technical analyst at Strategas. "Given their weight within the index, they're going to help drive returns." The push-pull between tech and growth on one side, and cyclicals and value on the other is very much like the expectations for the course of the pandemic. The coronavirus is expected to continue to spread, benefiting the stay-at-home and tech companies that rallied last spring. Then the vaccine is expected to reach more of the population, allowing the economy to reopen, benefitting those cyclicals, like industrials and materials. "For the last two weeks, you actually had high quality and growth-type names outperforming and value was underperforming," said Jonathan Golub, chief U.S. equity strategist at Credit Suisse. Golub said the market is taking news of a new virus strain and lockdowns in Britain seriously. "We had a mini value rotation. It was pretty powerful and abrupt, but already before we had this news, it was already fading and reversing." The tech sector was supported by its two biggest names this week. Apple , number one, surged nearly 3% Tuesday on a report it is entering the electric vehicle market. Microsoft, at number two, was also a positive influence. Fundstrat technical analyst Robert Sluymer said in a note that one reason he's comfortable staying long the market is because of the behavior of growth stocks, which have consolidated in an orderly fashion after peaking in September. "[Apple] and [Microsoft] do not appear to be major tops at this point. While other growth stocks, such as cloud, cyber security, payment and gaming have accelerated, [Apple] and [Microsoft] have been range bound but appear set to strengthen into year-end," he said. Some strategists have been expecting a correction in the beginning of the new year. Sluymer is one of them and said the S & P 500 still has a way to go before he sees it pulling back. "I'm guessing to 3,900 to 4,000. I think it's going to be a healthy pause. We've had a big run, and I think the market goes through a broad pullback consolidation, something in the 7% to 10% range going into the second quarter," he said. "It's going to be an opportunity to add to equities in general and cyclicals specifically." Sluymer said the market is poised to continue higher for now. A very high 70% of the S & P 500 are exhibiting strong price momentum, based on his proprietary indicator that looks at a 12 week rate of change in price. That could go as high as 90% before the market sells off, and at about 5% in March, it signaled the market bottom, he said. Sohn said he too sees 4,000 as a possibility before the S & P 500 pulls back. Sohn said the correction could be 10% to 12%. "It's going to be a correction you're going to want to buy. There's a lot more room to run. The trend and momentum is about as good as it gets," he said. "We just want to raise the flag on sentiment." Sohn said the put-call ratio is heavily tilted toward calls, or options that bet on rising prices. That can be a contrarian indicator when it's so heavily skewed toward calls. "I think the sentiment backdrop is going to be a problem," said Sohn. "It could be February, it could be March. I want to be mindful that there are areas that are extended. The Russell [2000] is 34% above its 200-day moving average." Sohn said some cyclicals have become extended and will be attractive later. "Down the line, you're going to want to look at names like Caterpillar and Deere . They've been so good. They're so overbought. Deere hasn't closed below its 50-days since May. That speaks to how good this is," said Sohn.

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Tech has been a source of strength in this week's choppy market, and big names could well take the market higher into the first quarter, chart analysts said.

In the tug of war between cyclicals and growth, tech has been winning lately. The sector is the top performer this week, with financials the only other major S&P sector showing some strength. The S&P 500 is down 0.6% in the period, closing at 3,687 on Tuesday.

Technical analysts say the glidepath for a short-term rally still looks clear, and tech could help lead the S&P 500 to the 4,000 area, before a market correction in the first quarter.