The biotech rally that has supported the market over the last three weeks has run its course.
The Biotech Index gained 16% and 470 points since May 12th on the run up into the ASCO cancer conference this weekend. Shares began to roll over on Friday with the index losing -2% for the day. This could be the beginning of the end for the Nasdaq rally if the biotech profit taking continues next week.
The prior week we had three sectors lifting the market. Those were biotech, semiconductors and financials. None of those three are expected to continue their gains next week. The financials crashed on Friday because of the weak payroll report and the impact on expectations for future rate hikes. Semiconductors have peaked at an 11-month high and should begin to take profits. The Broadcom and Ambarella earnings on Thursday pushed their stocks to big gains but the sector index only gained 2 points and closed well off its highs. There is no way that two-week spike is going to continue higher without some profit taking.
Financial stocks are likely to remain stuck in a range with risks to the downside but that depends on Yellen's speech on Monday. She could resurrect the June/July rate hike scenario but that is very unlikely. Without the hope of higher rates the financial stocks have lost one of their supporting factors.
Energy stocks rallied as oil hit $50 but the lack of any plan by OPEC when they met on Thursday has doomed crude prices to remain locked in a range in the weeks ahead. The most likely range is $45-$50 but continued inventory declines could possibly lift it to $55 but I would not bet on it. I think energy stocks are trapped in a range as well and the easy money has already been made.
The NYSE Composite Index held its gains last week but the intraday ranges were progressively narrower. The 10500-10600 range remains strong resistance and the supporting sectors from the prior week will no longer be providing that support. Those levels should be difficult to break but the NYSE is a broad 1,900 stock index that contains the large stocks like GE and XOM as well as hundreds of miniscule stocks that barely maintain enough market cap to remain listed. Therefore, it really takes a broad based rally to push it higher. If we remove one or two of those sectors that provided support in May the weakness will return.
The Russell 2000 Small Cap index exploded through resistance on Thursday as the biotech sector gained +2.5%. That support evaporated on Friday when the biotechs declined -2%. Resistance at 1,165 was broken for one day but even if the index does move higher it is still facing major resistance at 1,200.
The S&P-400 Midcap Index continued to break out out to nine-month highs thanks to the biotechs. This is the most bullish of all the index charts. If the midcaps continue to move higher, it could provide a spark for the broader indexes. The index is only 49 points from a new high.
The Nasdaq 100 big cap index stalled at 4,500 as stocks like AAPL, NFLX and GOOGL all rolled over starting on Thursday. It is not likely the index will break through resistance at 4,575 unless all three of those stocks suddenly turn bullish. The big cap techs may be the leading edge of a future decline.
The Dow Transports also peaked on Tuesday and then dipped significantly lower at the open on Friday. The 7,640 low was a 9-day low. The longer-term trend for the transports is down and we could see that trend reassert itself next week. The airlines are fading from discounted prices and people not wanting to stand in a security line for 3 hours on each end of a plane trip.
High yield bonds continue to soar despite a record number of new issuance. However, analysts are expecting spreads to widen and were not sure as of Thursday if the trend would continue. After Friday's jobs report, the high yield instruments should continue to be in favor. We are watching for the red line (HYG) to move ahead of the black line (SPX) to signal a major rally in equities.
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 correlation is nearly 100%. If the semiconductors begin to fade next week as I expect we could see the S&P follow the $SOX lower. Currently the spread/trend is bullish for equities but change could appear quickly.
The very long-term view of the market is still bearish. The S&P has traded in a 324-point range for the last two years. Eventually a breakout/breakdown will occur and the expected movement outside that range is 324 points. That targets either 2,458 on the upside or 1,456 on the downside.
The 10/21 month averages have crossed into a negative setup. Since 1995 if you had exited the market whenever the 10-month average moved under the 21-month and reentered when the averages reversed you would have captures the vast majority of the market moves in either direction. The averages turned bearish in March and remain bearish until the 10-month moves back above the 21-month.
The shorter term weekly chart has seen the 50-week average move below the 100-week average and that is also negative.
The short-term view is neutral. We are now into June and approaching the summer doldrums where volume is very light and volatility can increase. With funds flowing out of the market the last 8 weeks it suggests a lot of investors are choosing to wait safely on the sidelines until the summer is over.
Enter passively and exit aggressively!
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