It’s time to be very picky. 

You see, we currently have a very bifurcated market.

On the surface, everything looks fine. The S&P 500 (SPY) and the Invesco QQQ Trust (QQQ) are hovering near all-time highs. 

But there’s turmoil below the surface.

Only about a quarter of S&P 500 stocks are above their 50-day moving averages. Breadth is also as bad as it was at the depths of the April correction.

And yet, both SPY and the QQQs are less than 2% off their record highs. 

The Invesco S&P 500 Equal Weight ETF (RSP) makes the disconnect clear. RSP has been sliding lower for the past six weeks. It’s more than 6% off its highs and trading below its 21-week moving average. 

So, where is the strength? Tech.

The State Street Technology Select Sector SPDR ETF (XLK) recently broke out of a multi-week base. It’s now forming a bull flag above that breakout.

The “generals” have a lot to do with this. And several parts of tech are pulling their weight.

The Roundhill Magnificent Seven ETF (MAGS), which gives equal weight to the Mag 7 stocks, recently broke out of a multi-month base.

This is huge. It tells us the world’s biggest and most important stocks are doing their part. But this isn’t one of those “it’s just seven stocks” rallies. 

Software stocks have also been working, especially cybersecurity names. Then there are semiconductors, which are the single most important industry group. 

The iShares Semiconductor ETF (SOXX) just broke out of a multi-week base. It’s now forming a bull flag of its own.

A breakout would add another piece of evidence that tech remains in control.

The takeaway for traders is simple: Focus your attention on the stocks that are actually working. Right now, that’s tech. 

Within the sector, I’m most bullish on semiconductors. Unlike software, semis have spent the past three to four months building out bases.

Leaders are just starting to emerge. This tells me that semis could be among the market’s top performers between now and the end of the year.

Justin Spittler

Director of Trading, RiskHedge

PS: A market like this is exactly why I built Express Trader. When only a few areas are really working, you have to be picky. I scan hundreds of charts and narrow them down to my three favorite trades each week. If you want to trade alongside me, click here to learn more about Express Trader.