Semiconductors. Financials. Small Caps. 10 Year Treasury Yields.
Take a look at the following chart as the relative performance of each of the above is plotted against the S&P 500:
These are four of the biggest reasons why the market hasn't been able to sustain a move to the upside since April. Until relative leadership returns (and stays for more than just a few days), the market is destined to waffle or head lower.
Semiconductors have been dreadful. Talk about a lagging group since April! The S&P 500 is 3% away from a significant breakout above its June high. Semiconductors, on the other hand, are currently situated 15% below their June high! That is NOT what uptrends are made of. Semiconductors rallied this past week, outperforming the S&P 500 in the process. That's a great start. But before you get too excited, please realize that significant price resistance is dead ahead. In fact, we've included the SOX as our Chart of the Day for Tuesday, September 7th. CLICK HERE to view the critical resistance levels the bulls must negotiate as we enter another trading week.
Financials are key to nearly every uptrend in the overall market. In April, I discussed the lack of follow through within the financial space and that turned out to be a significant red flag as the market topped. In early August, as the S&P 500 continued testing its 1131 price resistance, the Dow Jones US Financial Index failed to clear 271 resistance. Once again, it proved to be a warning sign as the S&P 500 dropped nearly 10% over two weeks. 240-271 is a very significant trading range on financials. Whichever way we break in financials is likely to have a major impact on overall market direction.
The Russell 2000 may hold the very first test for the bulls on Tuesday. Check out this chart:
The downtrend line off the April highs and the short-term price resistance both intersect almost exactly on Friday's close. Early bullishness next week in small caps could bode well for the overall market. Those who are in the intermediate-term bearish camp (including Invested Central) could consider trading the juiced ultrashort ETF (TWM), considering the strong reward to risk. If the Russell 2000 moves much higher, you could exit with minimal loss. However, if the Russell 2000 has found another intermediate-term high, a juiced short at this level would perform extremely well.
The selloff in bonds, and the resulting spike in bond yields, surely played a big part in equities rising last week. In fact, the yield on the 10 year treasury hit MAJOR support in the prior week and was one of the reasons I felt we'd see a rally last week. It didn't change the bigger picture, but definitely suggested the bulls had wrestled short-term control and could advance further in the near-term. I alluded to that in my comments last Sunday evening. CLICK HERE for more details.
Below is the chart on the 10 year treasury yield and the key support level just tested:
It appears as though the yield could rise to the 2.88% area to test broken support. So long as the yield rises, equity prices should remain stable to higher. If the yield begins falling again, all bets are off.
Happy trading!
