A quick view of some signals the market is giving us during the expected relief rally.
We used two premier Semi Equipment companies as a gauge in ratio to the general Semi sector and broad Tech to see if we can refine an early negative economic cycle signal just as it provided an early positive cycle signal in 2013.
AMAT/SMH has bounced to resistance, but more important resistance would be the now declining SMA 50. LRCX/SMH is worse off, well below key resistance, which will soon be coinciding with the declining SMA 50.
The weekly view shows both items firmly in trend breakdown mode below the moving averages.
The Semi Equipment stocks vs. broad Tech are in daily breakdown mode.
And the weekly ratios are also negative below the noted moving averages.
Here is the view of the Semiconductor index potentially breaking down vs. NDX. SOX has led NDX since even before our first positive Semi Equipment signals (i.e. bookings) in January of 2013.
The monthly view shows a still-intact trend, however so… let’s not put the cart before the horse!
In 2013 we used the PALL/Gold ratio to cross reference positive activity in the Semi sector and today we use it to cross reference negative potentials. PALL/GLD has held the SMA 200, much like the broad stock market. The positive indicator is intact even though it got hammered over the last couple of weeks. Daily PALL/Gold and the Semi ratios above actually helped alert us to the market’s short-term disturbance.
But the longer trends are what will be important in managing the macro. Again, a hard hit but no breakdown.
Now let’s look at a risk on/off indicator beneath the market’s surface.
While nominal junk bonds got hammered and are indeed in a negative technical state below the daily SMA 200…
The ratios of junk to relative quality have not only not broken down, they remain elevated.
Also, the counter-cyclical, defensive and risk ‘off’ stuff has not at all taken any leadership from the S&P 500. Side Note to gold bugs: I don’t like this condition if I am a long-term gold bug. This rebound needs to change the situation or else the miners remain on a bounce but nothing special (yet).
And finally, the ‘man in the middle’ is still in a big picture breakout mode.
We try to find early indicators for a reason… to be early in seeing what might be ahead. Dialing back to January of 2013 it took a few months to confirm a trend in the Semi Equipment bookings and to cross reference a positive PALL/Gold ratio with it. So it is important to realize that signals come at various times; some are very sensitive and others, dull.
While nothing in this casino is assured, what we can say right now is that the fledgling signal in Semis is still in play and still negative while the broader aspects of the market have not yet gotten the memo. What I think the above is telling me is that the markets and eventually the economy will weaken but there is gas in the tank for the short-term. That short-term may be a further relief rally in stocks per the sentiment backdrop that became rapidly over bearish or it could simply be that this correction, when it resolves, will have been a good buying opportunity.
If the Semi signals stay on track though, I’d start to ease away from the happy stuff. The plan (well, my plan) as of now is to sell the relief rally at logical resistance areas (SPX, for example) and then evaluate. The evaluation would be whether the correction is to resume (favored) but then a question of bull or bear market comes into play, and if for example, SPX were to drop again to fill the 2460 gap it might be time to get very bullish. We’ll just have to wait and see… and keep an eye on our Semi cycle signals among several others. It’s a process.