In The Week Ahead: 2 Reasons The Market Could Move Higher

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All major U.S. indices closed higher for the third consecutive week, led by the tech-heavy Nasdaq 100, which gained 1.4% and is now up 4.9% for the year. As I've stated in previous reports, this is particularly important because technology issues, ideally with some help from small-cap stocks, typically lead the broader market both higher and lower.

From a sector standpoint, last week's rally was led by health care and industrials, with the recently rejuvenated energy sector the only one in negative territory. Meanwhile, materials, which were extremely weak during the fourth quarter, have quietly been the strongest sector year to date, up 6.9%.

This suggests the opportunity I pointed to in copper futures and PowerShares DB Base Metals ETF (NYSE: DBB ) in the Dec. 8 Market Outlook could begin to get some traction in the marketplace. I continue to watch the materials sector and copper as emerging investment opportunities in 2015.

Cisco Leading Technology Higher

In the previous report , I highlighted an emerging breakout in the Nasdaq 100 following 10 weeks of investor indecision that targeted a 5% rise to 4,600. In the past week alone, the index gained 1.4% to close at 4,443 on Friday.

In the Nov. 17 Market Outlook , I pointed to a buying opportunity in Cisco Systems (NASDAQ: CSCO ) , which I discussed on CNBC on Nov. 12 , targeting a run to $32. CSCO is now just 8% below my target, closing last week at $29.61.

CSCO Market Outlook Chart

This is important because of the tech bellwether's close and stable positive correlation to the Nasdaq 100 since 2011. Per the correlation, an additional 8% rise in CSCO, which has outperformed the S&P 500 by 14 percentage points since my initial call, helps corroborate my 4,600 upside target in the Nasdaq 100.

Small Caps Coming Back to Life?

In the Feb. 9 Market Outlook , I pointed out that the small-cap Russell 2000 was on the verge of breaking out after a much longer and more significant period of sideways action that began in March 2014. That breakout took place last week and now targets an additional 7% rise to 1,320 that will remain valid as long as the upper boundary of the indecision area at 1,213 contains as underlying support.

Russell 2000 Market Outlook Chart

This emerging breakout is particularly important because, as mentioned earlier, strength and leadership from both technology and small caps are characteristic of a healthy and sustainable market advance.

Declining Volatility Supports Higher Stock Prices

In the Jan. 26 Market Outlook , I said that without a significant decline in the Volatility S&P 500 ( VIX) to indicate investors were collectively becoming less fearful, the stock market was vulnerable to more near-term weakness.

The next chart show that the significant decline I was looking for finally occurred last week as the VIX moved below its 50-day moving average, indicating an extreme in investor complacency that most recently helped facilitate the advance in late October to early December in the S&P 500.

SPX VIX Market Outlook Chart

This reduction in market volatility is particularly important now, as major indices are resuming their 2014 bullish trends, because it indicates investors are now collectively confident enough to support a move to fresh highs. As long as the VIX remains below its moving average, currently at 17.91, I expect last week's market advance to continue.

Emerging breakouts in several major U.S. stock indices from months of sideways investor indecision target an additional advance. Moreover, the November breakout in technology bellwether Cisco Systems corroborates the recent strength in the Nasdaq 100 and Composite indices.

This across-the-board strength in equities is further supported by last week's decline in market volatility, according to the VIX, which indicates investors are now collectively confident enough to support a move to fresh highs.

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This article originally appeared on Key Breakouts Point to More Gains Ahead

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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