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Message of the Markets: Stock Market Moving Higher on Good Days; Consolidating Gains Politely on Bad Days


While many naturally intuitive arguments can be made on the bearish side of things, the market is ignoring most, if not all, bad news.


The greenback remained under pressure for the most part last week. The chart below shows the US Dollar Index (DXY) on a daily basis going back to December. The short-term downtrend line (red) remains intact for now, but you can tell that the buck is making every effort to break out. So far, it has failed to succeed, but if and when it does, we may see some pressure on stocks and commodities globally. Until that happens, the risk trade remains "on".

Click to enlarge


What may cause the Dollar to break its downtrend line? Maybe higher US interest rates. The chart below shows how the yield on the 10-year US Treasury Note (TNX) has broken out and closed (on a daily and weekly basis) above the short-term downtrend line. To me, this looks like a bullish chart (meaning it may be time to short bonds -- betting on lower prices and higher yields).

Click to enlarge


While I'm seeing breakouts (to new 52-week highs) in small caps, mid caps, and emerging markets, I'm not seeing them yet in the major US large cap indices. See the charts and the comments below:

The S&P remains below the February highs, as does the Dow Jones Industrial Average.

But the Russell 2000 Small Cap Index and the Russell Mid Cap Index have already broken out! This is surprising since a lower US Dollar typically benefits large cap multi-national stocks.

The caution flags are also still up on US stocks as a result of what I'm seeing in the charts of the banks and the semiconductors. The first chart below shows the KBW Bank Index and what appears to be a modified head-and-shoulders topping formation. The BKX needs to take out the $53 level in order to negate the bearish set-up I'm seeing here. The downside target for this formation remains somewhere down in the $49 - $50 area.

Click to enlarge

The chart of the Philadelphia Semiconductor Sector Index (SOX) is shown below. I don't see how this can be seen as anything but bearish at this point. The downtrend line was broken convincingly and then that same line acted as strong resistance when the SOX attempted to rally recently. The recent rally was also thwarted at the bottom of what may be a wave 1 (see the left yellow highlighted circle) in late February. To me, until 445 - 450 is taken out on the upside, the SOX's chart will remain bearish.

Click to enlarge

Another bearish "pebble in the shoe" for the bulls is the fact that the intermediate-term trend of S's over N's is still intact. As the bottom graph on the left chart below shows, the short-term uptrend was broken recently -- good for the bulls -- but the spread ratio seems to have stabilized and maybe even turned higher (green square).

The SOX, the BKX, and the SPY vs. QQQ ratio all are points of caution, but the chart above gives us some bullish evidence in the form of the relationship between the iShares Emerging Markets ETF (EEM) and the S&P SPDR ETF (SPY). When the spread ratio (bottom graph) is trending higher, it typically means good things for global risk investors. Obviously, the US stock market can move higher even when the ratio is lagging, but when the ratio is moving higher, stocks and commodities alike are probably clicking on all cylindars (like now). So, score one for the bulls on this indicator.

Overall, while many naturally intuitive arguments can be made on the bearish side of things, the market is ignoring most, if not all, bad news and continues to move higher on its best days and consolidate gains politely on bad days (in the short-term). As always, we must respect the market as most of us do not have the capital base to be on the wrong side of things for an extended period of time.

Lasting through April 15, 100% of the donations made to The Ruby Peck Foundation for Children's Education will be channeled to the children of Japan as they attempt to find their footing following this natural disaster; and to kick off this drive, we'll pledge $5000 to get it started. Please do what you can, as it will add up, and thanks.
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