Two big events on the horizon are Federal Reserve Chairwoman Janet Yellen speaking before Congress and the launch of earnings season with reports coming out from big banks. But until those get under way, investors are paying attention to whether the tech sector can follow through with a recent gain and whether oil prices can pull out of a slump.
On Friday, stocks finished higher for the session and week on the back of a rebound in tech stocks with the Dow Jones Industrial Average DJIA, +0.44% rising 0.3% for the week, the S&P 500 index SPX, +0.64% rising less than 0.1% and the Nasdaq Composite Index COMP, +1.04% advancing 0.2%.
On Friday, tech stocks jumped 1.3%, accompanied by a 0.6% rise in financial stocks, while the energy sector continued to lag, declining 0.1%, as the price of crude oil settled down 2.6% at $44.23 a barrel, for a weekly drop of 3.9%.
Tech and financial stocks have been of particular interest recently as the past 30 days have seen a rotation from the former to the latter. Based on exchange-traded funds following the sectors, the Technology Select Sector SPDR Fund XLK, +1.16% has declined 4% while the Financial Select Sector SPDR Fund XLF, +0.68% has gained 6.3%.
With Friday’s gains in tech, investors need to see some follow through, rather than a momentary bounceback from short covering or bargain hunting, strategists say.
“There was a rebound [Friday] but we need to see that carry into next week,” said Robert Pavlik, chief market strategist at Boston Private Wealth, in an interview. “I’m not overly confident as it’s a little too early to call a bottom.”
On the other hand, a breather in tech stocks may have been needed as a result of their outperformance on the year.
“Look at the reason tech grew: It’s because it’s the relatively few areas of growth in the market,” said Brad McMillan, chief investment officer for Commonwealth Financial Network, in an interview. “If you’re not going to be in tech then where are you going to get that growth?”
As the most-heavily weighted sector on the S&P 500, how tech stocks behave in the coming week matters as large tech names start reporting in two weeks.
“Tech earnings will be really important because the market is not going to give them too much leeway,” said Mark Kepner, managing director of sales and trading at Themis Trading, in an interview.
Before that happens, investors will need to digest many big bank earnings with J.P. Morgan Chase & Co. JPM, +0.50% Wells Fargo & Co. WFC, +0.32% and Citigroup Inc. C, +0.41% reporting Friday. Most recently, the sector received a boost in late June after the largest U.S. banks passed a Fed stress test on how they could withstand a market shock.
With the prospect of more Fed rate increases this year, along with balance sheet reductions expected in September, and signals that other central banks are shying away from easing measures, outlooks from banks following their respective earnings will be a key focus, especially after investment banks signaled a slump in second-quarter trading activity back in June.
“When you look at the dividend announcements, banks feel they can be more aggressive in their business and that can drive share prices higher,” Commonwealth’s McMillan said.
All the while, investors are still keeping an eye on the energy sector, which is dealing with volatility in the price of oil. While broader markets have been relatively calm, oil prices have not, and there’s concern that a further drop in oil prices could rattle the broader market.
“If oil gets to $40 a barrel or lower, that could be alarming for markets,” said Themis Trading’s Kepner.
Currently, Boston Private Wealth’s Pavlik is looking at $44 a barrel as a critical level. If it drops below that, markets could see prices fall to below $42 or $40 a barrel. Other than decimating energy shares, a prolonged drop in the price of oil could spread to other sectors, he said.
“It could spread to industrials and transportation,” Pavlik said. “That certainly doesn’t support 3% GDP growth.”
But volatility in oil prices isn’t as much of a concern to some, seeing that oil prices have become less dictated by cartels.
“With oil, I think we’re seeing normal volatility,” said Commonwealth’s McMillan. “The market is adjusting to no longer a managed market. Now we have a free market, so there’s more volatility that we’re just going to have to get used to.”