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Point & Go Figure: BKX vs. SPX, SOX vs. SPX



Market Overview:
The short-term is positive, but extended. Meanwhile, the percent of stocks above their 50-day moving average for the NYSE and Nasdaq are now both well into high-risk, high probability topping areas.

Percent of stocks above 50-day moving average - NYSE
(Chart courtesy Dorsey Wright)

There are still no changes to the long-term indicators that continue to suggest we are nearer the end of a long-term topping process than the beginning of any important new leg higher. Meanwhile, there continue to be select individual stocks that remain technically sound even as the broad indices show narrowing breadth and weak long-term technical patterns.

One of these charts is not like the other:
Steve Shobin called this morning to point out to us the relative performance of the Banks sector (using the PHLX Bank Sector Index) versus the S&P 500. Sure enough, running the chart on a point and figure basis is quite interesting.

BKX vs. SPX, ratio chart 3.25% scale
(Chart courtesy Dorsey Wright)

This ratio reversed down from an extreme that is even greater than the 1998 extreme, the peak on the left of the chart.

Ok, so now what? Well, check out the higher bottoms and the reversal up that occurred this past summer in the PHLX Semiconductor Sector Index vs. the S&P 500. I used a larger percentage change scale to compress the movement into a tidier chart, but the point is still evident - there is relative outperformance emerging from what has historically (since 1999) been the lower range of this chart.

SOX vs. S&P 500, ratio chart 6.25% scale
(Chart courtesy Dorsey Wright)

We have two very different pictures of relative performance and risk above. Of course, it is important to note that relative performance does not translate into absolute performance, and if one believes risk remains high across all markets, then what the pictures above suggest is simply the potential for slightly less risk in Semiconductors compared to Banks.

Nevertheless, there are many reasons one may require exposure to equities, and all things being equal, my opinion is that based on the technical evidence I would rather have exposure weighted toward technology and Semiconductors than financials and Banks.

Meanwhile, how does the SOX look on a point and figure price chart?

PHLX Semiconductor Index (SOX)
(Chart courtesy Dorsey Wright)

On a 10x3 scale, PnF basis, the SOX recently gave a new buy signal.

PHLX Semiconductor Index (SOX)
(Chart courtesy Thomson Financial)

Meanwhile, as the daily chart of the SOX above shows, we just received a TD-Sequential 13 sell signal. Bottom line: while the SOX relative to the SPX suggests positive context, and the PnF price chart of the SOX suggests positive context, the daily DeMark position would suggest a high probability of a better entry point down the road.

No positions in stocks mentioned.

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