The main event behind Friday's short squeeze was the positive guidance by Applied Materials. The secondary forces pushing the markets higher were the Dow Transports and the Russell 2000. The Transports gained +1.1% on strong gains by the railroads and minor gains in the airlines. The railroads were seen as oversold and a port of safety in the market storm. The airlines rose after Jet Blue said they were going to cut some capacity to offset the heavy discounting currently in progress.

The Russell 2000 rose because of gains in semiconductors and biotechs. The Semiconductor Index gained 3.1% on the AMAT news. The sector had been consolidating from a sharp drop at the end of April on earlier earnings misses.

The biotech sector currently has a positive bias because of the ASCO cancer conference from June 3rd through 7th. There are dozens of companies presenting their latest findings and many times at least a few stocks suddenly find their shares rising after the presentations. This powered the Russell and the Biotech Index higher. This is a short-term event and once the conference passes, the vast majority of stock will begin to fade. Only those with good news will see increased buying.

The Russell 3000 ($RUA) is the 3,000 largest stocks in the market. The support at 1,195 held on Thursday at the close despite a solid intraday break. That break should have weakened that support so the next test could fail. There is almost no near-term support for the R3K once that 1,195 level fails.

The Dow posted its first 4-week losing streak since October 2014. Critical support at 17,500 broke but then recovered at the close on Friday. That fingernail grip on 17,500 is not likely to last and it could be a long drop to 16,500. There is very little near-term support under 17,500. Since all the Dow stocks have reported their earnings, we are in the post earnings depression phase where investors are moving out of those stocks and looking for something new to play.

On a positive note the High Yield Bond ETF (HYG) is moving higher and it typically leads the S&P. This should continue because of the expectations for higher rates and the urge to avoid the equity markets in search of a safer investment ahead of a Fed rate hike. If the HYG continues above the S&P it could spark an rally in equities. I have to admit I do not understand why that would happen in this context but the HYG always leads equities.

The McClellan Oscillator is moving very close to the oversold range and could be predicting a rebound. However, the last three significant declines die reach the -90 level before rebounding. This is an overbought/oversold indicator and it is telling us to look for a bottom.

Since the NYSE Composite Index is much stronger on a relative basis than the Dow or S&P it would seem the NYSE could rebound before those other indexes. The comparable support on the NYSE is 10,000 and the index closed at 10,250.

The percentage of S&P stocks over their 200-day average has stalled the decline at 65%. This suggests some broader firming in equities beyond what we can see in the index values.

However, the percentage of stocks over their 50-day average has sunk to 48%, which was about 5% higher than Thursday's reading at 43%. The shorter term average is more than likely rising in most stocks at the same time the recent selling has pushed prices lower.

The S&P Bullish Percent Index declined to show only 67% of S&P stocks have a buy signal on a point and figure chart. That is down from 80% in early April. This is a bearish indicator. P&F charts are calculated differently than regular price charts and once reversed to a sell signal they can remain there for a longer period.

The Chinese economy and markets tend to lead the U.S. markets. The Shanghai Composite index is threatening to decline to three-month lows and possibly retest the lows set back in Feb/March. If current support breaks it could lead the Fed to reconsider its current rate hike bias and would likely weigh on U.S. markets.

The Japanese Hang Seng index is falling and appears headed back to retest the lows below 19,000. Like the Chinese markets the Japanese markets should weigh on U.S. equities.

The falling markets seem to indicate the current stimulus programs in each country are not working and investors are afraid of future events.

The rising dollar has not yet impacted commodities for more than just a couple of intraday blips. The CRB Index is at the highs for the year but this will not remain in an uptrend if the dollar continues to rise and the Chinese/Japanese markets continue to decline.

The Semiconductor Index always leads the S&P at major turning points. Look closely at the blue line and you can see the relationship. The SOX averages about a 10-14 day lead over equities. The spike on Friday is a fluke. It only matters if the semi stocks continue to climb. If they roll over quickly and return to test the lows they will drag the S&P lower. The correlation is nearly 100%.

The short-term view is bearish. Once we get into June and the summer doldrums take hold the current market weakness could fade and just turn into choppy trading for the summer as we wait on OPEC, the Fed and the political conventions in late July.

Enter passively and exit aggressively!

Jim Brown

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