I Wasn’t Wrong About Oil

The big, bad tech stocks have dominated the market during the first half of 2023.

The Technology Sector SPDR (XLK) and Communication Services Sector SPDR (XLC) have gained more than 36% year-to-date.

Individual 2023 performances are even more impressive. NVIDIA Corp. (NVDA) has rocketed 190%. Meta Platforms Inc. (META) has risen 140%. Tesla Inc. (TSLA) — a consumer discretionary name that acts like a tech stock — is up more than 120%.

Even the more reasonable gains are refueling investors’ battered 401(K)s this year. AAPL has cruised to year-to-date gains of nearly 50% following a late June run to new all-time highs. Microsoft Inc. (MSFT) is up a modest 40%. Semiconductor standout AMD is up nearly 75%.

The market gods have also blessed the investing masses with a fresh tech bubble as artificial intelligence stocks rake in the speculative bucks. Many of our aforementioned winners have benefited from the hype, while the flagship pure play C3.ai Inc. (AI) has come out of nowhere to post gains as high as 325% year-to-date.

Obviously, these are some of the best trades for the first half of 2023.

But what if they need a break?

For the record, I don’t think it’s time to start aggressively betting against tech. We want to ride trends — not fight them.

But it is time to begin thinking about what stocks could begin to outperform during the second half of the year.

What’s Next if Tech Corrects?

In June, we discussed how some of the FOMO money might be buying into a toppy market at the summer doldrums approach.

This idea is simple: if the major averages continue to follow a typical pre-election cycle, we could see the S&P 500 top out now and correct/churn in a range until a final push higher beginning in November.

If Q3 and Q4 roughly follow this script, we can assume that the summer churn will include some market rotation. Perhaps the first half winners will finally begin to digest their gains as different stocks and sectors take on short-term leadership roles.

Unfortunately, this also means speculators are probably piling into tech stocks as a short-term top emerges. I’m not deriding the retail mob by saying this, either. It’s simply the most plausible scenario, especially since the Nasdaq just posted its best first-half performance ever.

Now that the herd is wise to these powerful trends, tech can top out for the next four to six months while other stocks catch a bid.

As traders, we need to stay on top of this rotation as it begins to play out. The financial media will be much more interested in correcting tech winners than the next rally. Plus, the averages could also mask the rotation. If big tech drags, it could weigh on the cap-weighted averages even if large swaths of the market move higher.

Our best bet is to stay proactive and explore the potential winners of a bigger market rotation into the third quarter…

Worst to First

The energy sector dominated the 2022 bear market.

This year? Not so much.

In fact, The Energy Sector ETF (XLE) is the worst performing major sector of the year, posting a drop of almost 6%. The price of oil has slipped steadily lower since its Ukraine war highs, culminating in messy, range bound action this spring. What was once one of the most crowded trades on the market has gone ice cold.

But we’re starting to see some rumblings in the energy sector.

We explored the idea of oil and energy stocks breaking their respective downtrends when OPEC jolted the oil market by announcing a surprise million-barrel cut in April.

XLE snapped back above its 200-day moving average and the key $82 pivot, setting the stage for a quick move back to $90 and a challenge of the 2022 highs. Yet the move didn’t stick, and XLE immediately fell back into its range.

Now, round two could be just around the corner.

XLE halted its skid before retesting the March lows, and continues to coil. While no clear breakout has emerged, this group isn’t that far from its highs as it continues to mark time.


Not only is XLE moving back toward the top of downtrending resistance, we’re also seeing some early movers hint that an upside resolution is on the way.

Oil services names already broke out last week. The VanEck Vectors Oil Services ETF (OIH) jumped nearly 7% Friday to post new three-month highs. Not only does OIH have the momentum, it’s also just about 7% away from topping its first quarter highs as names such as SLB and HAL lead the pack.

Perhaps I was just a bit early back in April when I proposed that oil fooled everyone into thinking it was about to fall off a cliff. I still believe more than a few traders will be caught with their pants down if we do get a legitimate, extended rally in oil and energy stocks.

Investors are squarely focused on the big tech winners. An energy stock breakout might not attract a ton of attention at first. But when it does, it could easily morph into the FOMO trade of the summer. Don’t sleep on it!

What do you think? Is energy setting up for a breakout? Or will it remain stuck in a wide range during the third quarter? Let me know by emailing me here.

The Daily Reckoning