While it seems difficult to suggest such a thing, fundamentals and valuations leave open the possibility that one day a correction will come that is not “orderly.” Further evidence to confirm this potential may be found in the anemic long term action of the semi-conductor stocks as measured by the $SOX index. In spite of a bevy of positive remarks by Wall Street Analysts and various semiconductor trade organizations, the $SOX index remains mired in a bear market. Following the broad market rally off of the 2002 bottom, the best the index could muster was a double top. At the present time, the $SOX index is about 15% off the double-top highs, made near each new year in 2004 and 2006. Also notable is the tendency the $SOX index has to swoon around the new year as this occurred in both ’04 and ’06. Comparing the action before and after the 2004 year end rally, the $SOX swooned in December, before the Nasdaq 100 topped.
Still recently, the short term action has been decisively bullish, and from a short term perspective, a move past resistance at 492 would do a lot for those bullish on semiconductor stocks. There is nothing here so far to suggest that a market correction is at hand, though. However, a failure of the $SOX index at its current level, may signal that both the rally and the corresponding correction are indeed “twins.” So in summary, the $SOX is at a critical technical area.
Homebuilder Update Last week, it was stated that, “The homebuilders, despite apparently horrible near term fundamentals (except for interest rates), are rising in the manner that GM has risen a short time ago. It appears that the homebuilders are going to move back to the neckline of the completed head and shoulders pattern and this would set up the selling opportunity of a lifetime.”
With the homebuilders continuing to rally concurrent with a bond market rally, some qualifications of the “selling opportunity of a lifetime” are in order. The rally’s angle of ascent is accelerating and with this technical condition in place, there is risk in blindly taking an unprotected short position at the neckline. The overall market sentiment is one where there is apparently no limit to the amount of bullish price action can be gleaned about an “experts” positive remarks. Such sentiment is nothing new as it has occurred during the late 1920’s stock market bubble. As Michael Nystrom articulated in a recent article about the market’s behavior before the 1929 stock market bubble crash: “The market turned volatile. But William Durant, founder of General Motors and big time stock operator was confident, and told the people they should be likewise: "Confidence!" he exhorted, "Not halfway confidence, but 100-percent confidence. This is the real basis for our prosperity!" Everything would be fine, he claimed, as long as the people continued to believe. And so it was the case. The market stabilized in the Spring and went on to register new all time highs. Today’s market is in a similar position in that positive remarks by the right expert, no matter how deficient in basis they are, can provide the momentum to boom the market beyond reason. Notable are press release comments by Robert Toll, CEO of Toll Brothers: "Fifteen months into the current slowdown, we may be seeing a floor in some markets where deposits and traffic, although erratic from week to week, seem to be dancing on the bottom or slightly above”. While far from exhorting, “Confidence!”, Toll’s positive remarks were successful in rallying the homebuilders’ stocks decisively. Today’s Market The market was down slightly on fairly large trading volume. Notable downs included the Nasdaq 100 and the semiconductor stocks, with the $NDX down 1.2% and the $SOX down 1.7%. If the current rally is to have a correction in ’06, the correction will probably need to occur over the next couple of weeks since trading volumes will be curtailed near the holiday season and the market will be dominated by the public. Yet in the near term it may prove to be significant that after leading since the late summer, the Nasdaq 100 seems to have lost its leadership as can be observed in the 2 year chart below.
Over the last 2 years, buying Nasdaq 100 at the down trendline break of the ratio and selling the up trendline break would have been a reliable, and not too late indicator. While it is not entirely clear as to whether this relationship will continue to pass the test of time, it is clear that this is a relationship that deserves careful observation and respect.
Although the Wall Street-analyst-downgraded homebuilders didn’t act well today, it is worth considering that the action was a lot less bearish than it was bullish a week ago when an analyst upgraded the stocks. This is another piece of evidence that suggests that the “selling opportunity of a lifetime” is not (yet) upon us. There was nothing in the down action in gold, silver and the stocks to suggest that last week’s generally bullish article on the Elliott Wave action of the $HUI gold bugs index is any less relevant today than it was last week. Have a great evening. Martin Goldberg
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