The Tell: Why tech stocks can continue to lead the S&P 500 higher, in two charts

Several broad measures of technology-industry stocks are hitting all-time highs, and that’s a bullish signal for U.S. stocks in general, according to one technical analyst.

As the above chart highlighted by Chris Kimble, founder of Kimble Charting Solutions, shows, both the equal-weighted Nasdaq-100 ETF QQEW, -0.04% the market-cap weighted Nasdaq-100 index QQQ, -0.32% and the VanEck Vectors Semiconductor ETF SMH, +0.85%  have hit all-time highs. That signals broad-based strength in the tech sector that is bullish for the S&P 500 as well, Kimble argued in a Wednesday blog post.

Read: Chip stocks set for sixth straight record high on strong earnings, 5G outlook

Particularly heartening for stock market bulls is a “gap-and-go” breakout pattern shown in the equal-weighted Nasdaq-100 index. A gap and go pattern forms when an index or stock opens a trading day significantly higher than its previous close, forming a gap on the chart, and is confirmed when it continues to rise without going back immediately to fill in the gap. Such a pattern can reflect intense buyer interest and serve as a bullish signal.

That the equal-weighted Nasdaq-100 index and the market-cap weighted index are both hitting new highs also signals the robustness of the technology rally, he said, as it shows recent strength cannot be attributed solely to the performance of just a few highflying stocks, as was the case for much of last year.

“Until proven otherwise, as goes tech, so goes the broader market,” Kimble said, in an interview. He pointed out that the Nasdaq-100 has outperformed the S&P 500 for the past 16 years, and during that time, the greater the magnitude of this outperformance, the better the S&P 500 has performed. Last week, the ratio of the Nasdaq-100 to the S&P 500 surpassed all-time highs set last summer.

“This breakout reflects continued strength by tech over the broad market, which historically sends a short-term positive message to the S&P 500,” he wrote.

See also: How a rally in semiconductor stocks may herald a global growth rebound

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