-- Weekly Market Summary --

Despised Alley Cat Bull Market Marches On

By Joe Duarte on July 9, 2017

This bull market’s resilience is remarkable, and although all good things must end, the post election rally, like a wily alley cat who climbs a never ending wall of worry seems to have nine lives. Last week I expressed my concerns about the technology selloff spreading to other sectors, noting: “it’s clear that things are changing and that the odds of a rapid and perhaps meaningful decline are rising if the selling in technology overwhelms the positive money flow into other sectors of the market. “ I also noted: “Of course, this may be yet another false alarm and we could be heading to new highs in the next few weeks.”

And since the markets like to make us all look foolish – as soon as I turned moderately bearish, the tech stocks seem to have found a bottom, and the rest of the market may have found enough support to keep things from falling apart altogether. It’s o.k. with me as I really don’t want the world to crash and burn. Moreover, I chucked my ego out the window a long time ago. To be honest, at this point in my life and career I don’t care to be right in the sense of making big calls and getting quoted in The Wall Street Journal. All I care about is a visible and tradable trend to be in place for a good while so I can make money for you and for me.

Sentiment Is Remarkably Leaning toward Moderately Bullish

Confessions of an old trader aside, it’s a good idea to look at the market’s sentiment during periods of uncertainty. For this purpose I use three measures: The CNN Greed and Fear Index (GFI), the American Association of Individual Investors Sentiment Survey (AAII), and the CBOE Put/Call Ratio. And surprisingly, the market’s sentiment, as measured by these gauges, is tilting toward the slightly bullish side of the equation.

For example, the CNN GFI checked in at 49 on July 7 th, but dipped into the low 40s during the week as the market started to increase its level of worry. This is bullish. The CBOE Put/Call ratio (combined index and equity numbers) delivered a bullish 0.95, while the index ratio, a sign of institutional sentiment was also at 0.95. Just for reference, consider this later number came in at 1.63 the week before the presidential election, which was a very bullish number and an excellent predictor of the current bull market. Finally, the AAII numbers show more bears (29.9%) than bulls (29.6%). This seems like a neutral reading, but in fact it tilts toward the bullish side since the percentage of bears rose 3 percentage points from last week’s numbers and the number of bulls fell 0.1 percentage points. Anything is possible, but it’s hard to see a market selling off much from here in the short term with these types of sentiment numbers without an external event of some major impact.

Breadth Remains In Up Trend

As I’ve said many times in the past, the most reliable indicator of the past several years has been the New York Stock Exchange Advance Decline line (NYAD) and it too remains in a bullish posture. I’ve been following this indicator closely since 1987, and there has never been a meaningful market decline without this indicator giving a sell signal over that period of time.

There are three important factors to consider regarding the NYAD line: The trend is clearly to the up side as NYAD remains in a rising channel and has recently found support at its 20 day moving average. This is a bullish pattern going back to the start of the rally in November 2016. Meanwhile, the RSI indicator is once again finding support at the zero line as it has done multiple times since the November 2016 bottom. Finally, the ROC indicator, which measures momentum, is also finding support at its zero line confirming the bullish implication of the action in the RSI.

Buy the Dip Crowd Lends S & P 500 Support

It will be interesting to watch the action in the S & P 500, which saw some selling in the past week. This is illustrated by the downward drift in the Accumulation Distribution indicator (ADI). And although this is certainly worth watching, it may be effective countered by the generally positive direction of the On Balance Volume (OBV) and also the apparent reversal in the ROC momentum gauge.

Also encouraging is the fact that SPX found support at its 50-day moving average (blue line) and the lower Bollinger Band (green lower line around prices). This suggests that buyers may again be willing to buy on the proverbial dip.

Chip Stocks Remain the Key

Much of the recent market’s weakness has been due to the heavy selling in the semiconductor index. This week I want to examine the chart of the Semiconductor Index (SOX), which is trying to bottom out.

There are three important aspects of this chart which suggest this sector of the market is on its way back up, at least in the short term. The RSI and ROC indicators, along with the Stochastics Oscillator (see bottom panel of chart), all hit oversold levels last week and have rebounded along with prices in the SOX index. Furthermore, every other time we’ve seen this type of technical picture in SOX over the last twelve months the index has ended its correction and moved on to new highs.

Failure in the SOX Could Be Very Bad News for Bulls

The semiconductor sector has led this post election bull market run from day one. At the moment its fate is in question, given the recent selloff. So far, the market has managed to hold up as banking, housing, and construction stocks have seen positive money flows, keeping the S & P 500 from falling apart altogether. Thus if the SOX index fails to further its apparent recovery, it may be the signal that the bears have been waiting for. The key is what happens to the chip stocks when the SOX index hits the 1060-1075 area, where the 20 and 50 day moving averages are potentially significant resistance points. A failure in this chart area for the chip stocks could mean the alley cat bull market is running out of time.


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