Trader’s Narrative

While the general market, tracked by large indices like the S&P 500 (SPX), fell to lower levels than late last year, there are pockets of strength in some sectors. One sector that is showing surprising strength is the seminconductors:

Not only has it put in a higher low, it is close to breaking out in its relative strength chart (compared to the S&P 500) - not to be confused with RSI. As well, the 50 day moving average is flat, with prices well above it. The only downside is that the longer term, 200 day moving average, is still barreling down at a good clip and about to smack it around the 255-260 price level. Also, according to the internal measures of the sector, it is just too extended.

Here’s a closer look at the breadth within the Philadelphia Semiconductor Index (SOX):

Notice the cluster of data points where 90% of stocks in the sector have closed above their 10 day moving average. Not only is this very rare, it is unsustainable. Especially as the general market is similarly over extended and catching its breath. While things look much better here, as prices levitate out of the abyss and extend up and away, it isn’t a good idea from a risk/reward view to start buying here. This is where the smart money starts to unload the positions they built during the darkest hours.

There are a few other sectors in a similar technical position. For example, take a look at the AMEX Broker Dealer Index (XBD). From an optimists perspective, all of this points to a gradual rebuilding of the market - not a new bull market! But when the generals that lead the charge are tired, it is time for a pause. From a pessimists perspective, the bear market rally has exhausted itself and the brutal reality of a continuing bear market is about to reassert itself.