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Such an environment makes it difficult for a market commentator with a taste for a “Man Bites Dog” story to come up with a compelling article. A writer wishing to discuss the falling dollar has to get in a long line because there is so much excellent commentary in circulation already. Writing about the hot sector becomes more Bou-Ya because everything is going up. And on that score, this market has produced a lot of Wall Street geniuses who owe their entire IQ to the existence of a Bull Market (expressed in US dollars). The precious metals market is leading the way, and for readers of this website this is good news because this was featured here from practically every angle before the crowd jumped on board the current precious metals bull market. But coming up with something that has not been said already about the precious metals market is a difficult, if not impossible task. If there are any “Man Bites Dog” stories in the market, it is a story about any market or sector that is not going up and this will be the focus of tonight’s short article. The semiconductor stocks tend to be a leading sector during economic expansions and a lagging one in slowdowns. About 6 weeks ago, the then-lagging semiconductor sector appeared to be at an important technical crossroad. Since that time, there was what appears to be a one-last-gasp-rally, followed by a return to market underperformance. At present, the rise in the stock market is not being confirmed by a rise in the semiconductor index. This is illustrated in the long term weekly chart of the Semiconductor iShares ETF. Thus far, it has failed to equal its January of 2000 high in spite of multi year highs in many major indices.
A closer look at the semiconductor ETF weekly candlestick chart shows a bearish weekly reversal this week indicated with the (assuming no rally on Thursday and Friday) red arrow.
Some important semiconductor stocks such as Broadcom are showing signs of a technical breakdown.
A Dow, Nasdaq, S&P 500 and Nasdaq 100 component, Intel (INTC) is an important stock within the semiconductor index, and the 19-20 area appears to be an important technical level with overall US stock market implications.
In spite of a bull market in almost everything, Maxim Integrated Products (MXIM) is breaking down. Expect an analyst upgrade soon.
With everything going up, technology in general is having difficulty making new highs. The Technology iShares ETF is an important chart to watch, because a push higher would be bullish for the overall stock market in the near term. The technology iShares have yet to better their winter of ’04 highs in spite of the preponderance helicopter money.
Over the last 10 years or so, the biotechnology stocks have led the market on many occasions. Since these companies have, by and large, negligible current earnings and no dividends, they trade mostly on market emotions. This is why a failure of the Biotechnology Index, as measured by the biotechnology iShares deserves attention.
While the point-and-figure (PAF) chart of the semiconductor index is still bullish, the PAF of the biotechnology index, even when measured in US dollars, is downright ugly. Note the failure at its 2004 high (left-most row of ‘Xs) and breaking of the up trendline (last row of ‘Os). On both charts (time/price and PAF), there is support for biotech in the low 60’s.
While good stock market leadership is needed for sustainable bull markets, the semiconductor and biotechnology sectors along with the technology generals (illustrated below), appear to be worthy laggards for the next bear market. Microsoft and Dell are near their 52-week lows concurrent with many market indices making all time highs. The market reacted negatively to Cisco’s earnings on Wednesday. Oracle is a late reporting company and it will be important to see how the market reacts to Oracle’s quarterly story.
Worthy bear market laggardship appears to be in place! Today’s Market All markets were down decisively today as the major markets put in a rare “distribution day.” If we are near a market top, and the major market trend is changing from up to down, it seems as if there is worthy laggardship in the name of the Nasdaq, Semiconductors, technology generals, and biotechnology stocks. The daily candlestick chart below depicts the Nasdaq market beginning at the October rally to the present. I’ve marked in red or black arrows significant and decisive market up and down days. These are days where the Nasdaq traded in a decisive up or down direction with exceptionally high volume. As shown in the chart, each decisive day (up or down) was followed with indecisive action on the following days. Is there anything different this time? Maybe there is. Today’s down day occurred on higher volume than any previous down day. Additionally, the 50-day moving average was crushed at the market open. It will be telling if the market recovers from a decisive down day as it has done on two separate occasions since October.
An important sector that is at an important crossroad is the homebuilders. If there has been any common denominator in the most recent bull market (as measured in US dollars), it is the action of sectors and stocks as they moved to critical support levels. The trend has been for support levels to hold or be broken and then be followed up with a fast and tradable rally. In the case of the homebuilders, we are there now.
The DJ US Home Construction Index, a former fan favorite, has carved out a textbook head-and-shoulders reversal and now sits on top of the right neckline. While the action in the next few weeks has obvious implications for the homebuilder sector, I believe that there may be implications for the overall stock market. A rally over the neckline would signal more of the same bullish behavior; whereas a break of the neckline could signal a beginning of a bearish bias to the stock market. The HUI and the XAU were down today. This is in spite of a rise in gold and silver. A correction has been due for a long time; so maybe the correction is coming. It doesn’t change the overall trend which is up for precious metals. Similarly, it seems to me there has been a lot of discussion about the high price of oil, and yet in the shortest of terms, oil has failed to better its ’06 highs. From a point and figure perspective, short term, oil is in a “sell” signal with a price objective of $63. I’d be hesitant to short oil in any form, yet for short term traders, the PAF signals provided by light crude oil have proven to be useful.
Finally, the following long term chart of the gold to commodities ratio is extremely telling in my view. It shows real money – gold – rising beyond all long term resistance and trendlines when compared to commodities. It is telling us that since late 2005, what appears to be economic growth (that would be indicated by real increases in commodities prices), is actually just growth of the money supply.
There is a mix of bad stuff out there, and it would be foolish to be fooled by a bull market (expressed in US dollars). You think this is just a wall of worry? Look around you. Do you see a booming economy? (note: This question is addressed to only those not employed in the financial industry.) I’m out of time. Have a great evening. Martin Goldberg
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