From the desk of Steve Strazza @Sstrazza
JC summed up our present view on US Equities perfectly during this week’s Conference Call:
“There are stocks we want to buy, and there are stocks we want to sell,” he told Premium Members on Monday night.
Some areas, particularly the secular leaders coming into the selloff, continue to trend aggressively higher while others refuse to participate in any meaningful upside.
A great example of this is illustrated by contrasting the chart of the Dow Jones Transports (DJT) to what we consider the “New Dow Theory” Average, the PHLX Semiconductor Index (SOX).
Click chart to enlarge view.
Notice how these charts typically trend together over time with divergences often occurring at key turning points. Examples of this would be the lower highs in SOX ahead of the Q4 2018 correction, or the higher highs and higher lows in SOX before both indexes went on to make fresh 52-week highs during the broad-based rally from Q4 2019 to earlier this year.
Even the nature of the new highs made at the end of last year and in Q1 of 2020 were quite different between the two Indexes.
Semiconductors had already achieved new all-time highs in April of 2019 and price was trading free and clear from any overhead supply in the form of price memory. As such, SOX continued to grind much higher ahead of the February-March crash. At the same time, Transports were struggling at their 2018-2019 highs and were actually never able to register new highs before prices collapsed.
This brings us to today. SOX has seen a tremendous bounce off its lows and is already trading well above those key 2019 highs. In stark contrast with the price action from Transports, SOX never even came close to testing its 2018 lows.
Transports, on the other hand, not only violated these lows, but after a weak effort at retesting them, price is now making lower highs and lower lows beneath this significant level of overhead supply. Meanwhile, Semiconductors continue to move in the opposite direction, as prices make higher highs and higher lows in the near term.
We continue to see weakness similar to that in Transports in other areas of the “Old Economy” like Financials and many Global Indexes (which have higher exposure to these more cyclical areas). These areas are also still trapped beneath significant overhead supply at their 2018 lows and underperforming in the short-term.
At the same time, other areas that represent the “New Economy” aside from Semiconductors, such as Internet (FDN), Software (IGV), Biotech (IBB), Medical Devices (IHI) and several niche Industry Groups like Online Retail (IBUY) are trading at or near all-time highs. This strength can also be seen at a broader level in the tech-heavy Nasdaq 100 (QQQ), the Tech Sector itself (XLK), Health Care (XLV) and the Growth Factor ETF (IWF).
The major question that remains is whether or not this tale of two markets can continue to persist indefinitely, or if these divergences will need to resolve themselves by either the strong areas catching down to the weak, or vice versa.
If the recent market environment has taught us anything, it’s that markets are dynamic and relationships like these are constantly changing. So maybe this time IS different…?
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