Broad markets add to the upside

Week starts with adding to the upside from last week with small caps, NASDAQ and semiconductors leading the way. The rotation back towards growth is still in play, but we have to proceed with caution. The reasonless bounce/rally needs to find conviction in volume and sentiment. The economic data was a plus as the consumer confidence rose better than expected in May and housing data is improving. Thus, if I had to assign a reason for the move higher the last week it would be improving economic data. One day at a time is still the mantra as we go forward.

Notes to Note:

  • The Volatility or VIX index moved again¬†to new lows…¬†Shows the lack of concern currently from investors over any downside pressure.
  • Small caps (IWM)¬†took on a leadership role today. Moved to the 50 DMA and looking for move on the upside if this trend is to continue.
  • Consumer confidence roes to 83 in May from 81.7 in April. Stagnant wages, hard to find jobs and cautious spending plans are keeping the number well below historical averages. The challenge to the consumer remains the economic growth relative to jobs and wages. The markets read the top line number and ignored the rest.
  • Gold falls 2.1% taking the miners down 3.8% on the day. That breaks key support on both sector charts. How much downside is on the horizon now that the support has given way to more selling? ¬†DUST was up nearly 12% on the day. The bias is leaning on the downside for now.
  • Interest rates¬†drifting lower again? 3.36% on the thirty-year bond and 2.51% on the ten-year bond. The divergence between yields and stocks is obvious and suggests something more is wrong. Be patient and watch how this unfolds looking forward.
  • Oil is¬†back near the $104 level and remains on the upside trek short term.¬†This is a tax on the consumer short term and will have a forward looking impact on spending. UGA fell 1% today as gasoline prices rotated lower. Watching this as it could lead to more selling once oil speculation settles.
  • China (FXI)¬†making me crazy. The volatility is not for the weak of heart, but the upside remains in play. EEM was down 1% on the day as well showing some consolidation currently.
  • Biotech¬†wants step back into picture going forward. A nice move on the upside has put the index in position to make a move back to the $260 level short term.

Chart Notes:

The SOX index broke above the downtrend line currently in play and cleared 585 resistance. That is all positive for the sector to resume the longer term uptrend. The entry point was hit to add positions in the corresponding ETFs that track the index on Friday. The follow through today confirms the push higher in momentum for the technology sector and semiconductors.

SOXX

The Russell 2000 small cap index is what we looked all last week to show the current crazy activity of the markets at work. Thursday the index followed through and cleared the 1110 level we discussed as a start to a reversal or upside move. Friday closed above the 200 DMA and moved in position to clear the downtrend line off the February high. The sector was still not taking on any leadership, but Monday showed a bullish move to start the reversal and lead teh broad market indexes higher. The index fell to support, but has held. As we stated in our post last week the goal was to add a position on the move through 1110 and then add to the position on a break above the 200 DMA and then the 50 DMA. Thus, two parts of the trade are complete with the move today to the 50 DMA. We still need to manage our downside risk in the event of a reversal from the bounce in progress. Stops would be a move back below 1110.

RUTX

The home builders chart we posted last week has been attempting to hold support and reverse the short term downtrend in play off the February high. As you can see below it failed to clear the resistance point on the close today after a good start to the day. Still watching to see how this plays out. The implications in the housing sector are important for the economic outlook going forward.

XHB

Each day we post new charts and update previous post in an effort to keep you informed on sectors and indexes that could and do have an impact on the overall direction and trend of the broad markets. The bottom reversal in play currently was started by the NASDAQ 100 index, but the Russell 2000 index above is started to exert influence on the broad market direction.