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Will Semiconductors Take Road to Riches or Perdition?

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It's little better than a 50/50 proposition now.

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Monday was a continuation of Friday's dull action in equities, confirmed by lackluster NYSE market internals. Most major stock indices finished mildly lower (Russell 2000 was marginally higher) and the commodities complex generally traded lower with the DBC down .5% on the day. The US dollar provided little direction as it finished slightly higher for the session. The DXY is still resting just below the key 80.73 level. Long-dated Treasuries were soft again as the TLT closed down by 0.4%. Yield on the 10-year note inched up to 3.80% at the close.

Yesterday I noted a recent pattern displayed by Treasuries: Directional moves have usually been three to five weeks in length. Below is a chart that makes this pattern clear. If Treasuries continue this trend, then my target yield near 4.10% on the benchmark 10-year could be within reach on this move.

Directional moves lasting three to five weeks have been common since initial move off of March low.



This morning: Hong Kong and Singapore advanced around 1%, while European markets are trading lower from 0.25% to 0.75%. Dollar strength versus five of six major currencies (down versus yen) has the DXY up a little and nearing 80.73. Oil futures are weak, down more than $1, while gold futures are flat. Consumer confidence is due out at 10 a.m. this morning.

Earnings due out today: Home Depot (HD); Macy's (M); Medtronic (MDT); Sears Holdings (SHLD); Target (TGT). Click here for complete rundown of companies reporting earnings, estimates, and actual results

Economic reports due out today: S&P Case Schiller Home Price Index at 9 a.m.; Consumer Confidence at 10 a.m.; 2-year US Treasury Note auction at 1 p.m. Click here for complete rundown of economic releases including actual versus estimated data.

Market internals: NYSE
(Figures are rounded)



Key Charts

Philadelphia Semiconductor Index ($SOX): Monthly Chart

  • Yesterday I analyzed the critical financial sector via the bank index and the broker/dealer index and determined financials were at the proverbial fork in the road. Today, I'm examining another weighty group -- semiconductors -- to get a better handle on the state of the equity markets. It will be difficult for stocks to make real progress without participation from this important technology sub-group.

  • The above monthly chart of the SOX reveals the importance of current levels and why the group's advance was halted. The 350 level had acted as support or resistance seven times since 1997, and presently serves as a rather large barrier. Obviously, any major progress in the SOX, and therefore, the market, will require overtaking this level.


Philadelphia Semiconductor Index ($SOX): Daily Charts



  • The two daily charts clearly show the SOX to be at a critical juncture in determining which direction the next big move will be.

  • Resistance comes into play just above current levels based on two factors:

    • The upper edge of the recent downside gap in the price of the $SOX at 347.91

    • The 61.8% Fibonacci retracement of the January to February decline at 347.77

  • Both levels correspond with the long-term band of resistance highlighted in the monthly chart of the SOX

  • Bullish factors (as noted in the second chart above) include:

    • The SOX is now trading back above its bull market uptrend line

    • It's trying to recapture the 50-day moving average on a closing basis


Strategy:
Wait to see which road the SOX takes here -- the road to riches or the road to perdition. It's little better than a 50/50 proposition now. This -- combined with yesterday's examination of the financials -- reveals much about the current state of the equity markets. There's just no edge right here. However, a weekly close for the SOX above the 348 level will be enough justification to initiate a partial position in the semis ETF (SMH) with the idea of doubling up if new highs are set.

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No positions in stocks mentioned.

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