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Stocks show gains, as bears lock in gains

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Stocks continue to show some nice gains today, but the market action still depicts that of some bears locking in some gains or cutting out with small losses as the "unexpected" recovery in some technology stocks continues for a second consecutive session.

Part of the reason I feel we're seeing some extensive short covering is that one of the day's best performing sectors is the North American Telecom Index (XTC.X), which actually leads sector winners with a 7.2% gain. That's enough to beat out the Wireless Telecom Sector Index (YLX.X) that is getting a 6.48% bounce. Both of these sectors were pummeled to new 52-week lows last week and it is my thought that the massive amount of selling from last week was not a bunch of bulls getting long in either of these sectors. Today's action probably isn't a bunch of bulls getting long either, but most likely a bunch of bears locking in some gains.

With only two sectors in the red today, Gold/Silver (XAU.X) -1.07% and Home Construction (DJUSHB) -1.66% the broader S&P 500 is showing a 21 point gain (+1.93%) to 1,123 as it encounters technical resistance at the 50-day MA.

S&P 500 Index Chart - Daily Interval

The S&P 500 Index (SPX.X) is trying to get back above its upward trend today after breaking below this trend earlier last week. I'm expecting some resistance at/near the 1,130 level and would be taking a more "neutral" stance in my trading.

"Neutral" to me means weighting my trading account with some short/puts along with some bullish selections. I will want to stick with what has brought me success in the recent past and that is to try and avoid many technology names from the bullish side of things.

The one "exception" to technology that has really held up well has been the semiconductor equipment stocks. This has been mentioned more than once in my commentary and today this is the sector that really has shown some good renewed strength after seeming getting pulled lower early last week as other technology groups got pummeled.

What a technology bull needs to avoid near-term is getting caught in the "bear rally" that could be caused from extensive short- covering and locking in of gains by the bears. What can happen is that bearish traders "cease" their buying as stocks rebound from a bottom, but when the "smarter" bull money isn't there to support things, the weaker technology stocks/sectors then continue a past downward trend.

Technology bears should not be "surprised" by the recent rally. The Morgan Stanley Cyclical Index (CYX.X) and even the Dow Transports (TRAN) have held together rather well in recent weeks. As noted last week, we paid special attention to the Cyclical Index (CYC.X) right near its upward trend on the bar chart and that index traded strong and rebounded. That rebound continues today with the CYC.X gaining 10.8 points (+1.88%) to the 584 level with the recently set 52-week high of 597.80 easily achievable.

It has been my thinking that if the CYC.X can break above the 600 level, then I'd look for further short-covering to take place in technology stocks. My thinking here is that the deeper cyclicals would lead an economic recovery. If the CYC.X breaks above the 600 level, the a technology bear's psychology could change and have him/her really stepping up their short-covering, then making for a nice rally in technology stocks over the next couple of weeks.

Jeff Bailey
Senior Market Technician
Option Investor

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