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All Eyes on the US Stock Market

July 27, 2020 By Mircea Vasiu

One of the most important earnings weeks just started – and it is likely set to drive financial market volatility for some time after. Facebook,  Apple, and Google are set to release their Q2 2020 earnings, and investors look for clues about where the stock market might head next. 

After the initial shock created by the coronavirus crisis, the U.S. stock market recovered almost miraculously. The Nasdaq even recorded a new all-time high, with the S&P500 and Dow Jones not far behind.

However this is not the regular stock market one may think of. The companies mentioned earlier, together with Microsoft, returned 35% YTD. In comparison, the remaining 495 stocks returned a negative 5%. Hence, the earnings this week are crucial for the stock market’s stability and performance in the period ahead.

U.S. Stock Market Outperforms Peers

The big tech companies from the United States took over the world. They were the first to ride the digitalization race and won every battle since.

The European Union announced the “Next Generation” EU fund that focuses on supporting the development of European digitalization technologies – but the lag to the United States is too big to fill so easily. In any case, it signals that the world wants to reduce its dependency on the big tech companies out of the United States.

The recent Huawei 5G technology scandal is just another example.

Driven by the big tech companies, the U.S. stock  performance relative to European stock prices sits at a whooping 70 year high.

The recent EU recovery deal agreed last Tuesday might set the stage for a comeback of the European equity markets. However, until that happens, the U.S. big tech companies are in the driving seat and will likely remain so for the time ahead.

Technical Analysis

In terms of technical analysis, the S&P500 ended last week with a bearish divergence against the RSI oscillator. A similar divergence was seen just before the March crash, and the big tech companies this time may be responsible for its confirmation.

However, divergences have a tricky history for the technical trader. Namely, the price can diverge from an oscillator and remain so more than a trader stays solvent. Therefore, it is always useful to take them with a grain of salt. Also, trading divergences mean picking tops and bottoms – a tricky business in a stock market index driven higher by cheap money and hot speculation.