By: John Kosar of Street Authority
All major U.S. stock indices finished in positive territory for the fourth consecutive week, led by the tech-heavy Nasdaq 100, which gained 1.6% and is now up 17.6% for the year. This index has been a major focus of mine since the Aug. 25 Market Outlook. Its move above major overhead resistance at 4,147 this month was an important catalyst for the recent strength in the broader market.
On a sector basis, technology, consumer discretionary and materials led. Utilities, energy and financials trailed the pack and finished the week in negative territory.
Cisco Systems Resuming 2011 Uptrend?
The recent strength and leadership shown by the technology sector resulted in a potential buying opportunity in Cisco Systems (NASDAQ: CSCO). I discussed the topic Wednesday on CNBC, just before the tech bellwether announced its fiscal first-quarter earnings.
CSCO, which is the 10th largest constituent stock comprising 3.3% of the technology sector index, broke out to the upside on Friday from 15 months of sideways action that indicated investor indecision.
This breakout indicates that CSCO's larger August 2011 advance has resumed and targets a move to $32, 22% above Friday's close. This will remain valid as long as the upper boundary of the indecision area at $25.90 loosely contains prices on the downside as underlying support.
Complacent Investors Support More Q4 Strength
In addition to the recent leadership from technology issues, another thing working in investors' favor recently is low volatility.
On the next chart, we see that the CBOE Volatility Index, better known as the VIX or the fear gauge, has remained below its 50-day moving average since Oct. 31. Not coincidentally, that is precisely when the Nasdaq 100 rose above its 4,147 resistance and the SP 500 started setting fresh 2014 highs.
As long as the VIX remains below its 50-day moving average, currently situated at 15.70, it indicates that the market is complacent or fearless enough to extend its recent gains. Put another way, it would take a sustained rise above 15.70 to suggest that a near-term market peak is emerging.
Is it Time to Buy Gold Yet?
The SPDR Gold Shares (NYSE: GLD) finished last week with a bullish outside range day (a higher high and lower low than the previous session) and its highest close since Oct. 30. This is the best news that gold bugs have had in some time. However, a look under the hood in this sector isn't quite so promising -- at least not yet.
Despite the strong rally on Friday, the total daily assets invested in GLD are still appreciably below their 21-day moving average. This indicates the July trend of monthly contraction is intact. It would take a sustained expansion in these assets back above the 21-day moving average, like we last saw in June and early July, to indicate that there is enough near-term bullish conviction to fuel a sustainable advance.
Until then, Friday's rebound is just a pretty bar on the price chart, and the possible, but yet unproven, start of something more.
Putting It All Together
The market-leading Nasdaq 100's move above its 4,147 September 2000 benchmark high, along with a low VIX and supported by leadership from consumer discretionary and materials, suggests investors are collectively feeling confident about the U.S. economy and are expecting better days ahead.
Moreover, last week's breakout in technology bellwether Cisco suggests the potential for more tech-led market strength through year end.
Finally, even though gold prices showed some preliminary signs of life at the end of last week, recent asset flows suggest it is still too early to assume that a sustainable bottom is in place.
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