Topics: Semiconductor stocks breakout; ESIO bottoms; KSS and TCF breakout; is the Dow within hailing distance of a pullback? The semiconductors which were hit hard in November during the rotation into Financials have rallied to new highs. I will show the strongest stocks propelling this rally.
Chart 1: The $SOX index broke out to new highs, after enduring a significant sell-off during the rotation in to Financials in November. It's bounce has largely followed my analysis (see here and here).
$SOX Makes New Recovery High
I have followed the $SOX index since early December and the rebound has largely followed my expectations (see here and here). Last week I pointed out that NVDA had completed its recovery from the selloff. The $SOX index first tested the old high, pulled back as weak longs sold out, and pushed higher after retesting the high (see Chart 1). The 2-hour CTM in the lower panel confirms the strong trend in this group.
The stocks leading the parade today were Texas Instruments (TXN) and Lam Research (LRCX). The RRG chart shows large cap semiconductors have been stronger than the market since the start of the new year (see Chart 2). TXN, NVDA and LRCX are all in the green quadrant.
Chart 2: In comparison to the $SPX, semiconductor stocks have improved their relative performance since the start of the year.
I extend the analysis beyond just relative strength changes, by simultaneously comparing the relative performance (via SCTR) and the absolute trend strength (via Chande Trend Meter). The joint analysis shows that TXN and NVDA are stronger than the SPY on both a relative and absolute trend strength basis (see Chart 3). Since it is not strictly correct to compare the SCTR values of the SPY ETF with individual stocks, I use the SCTR and CTM values of the average large cap stock in the S&P 500 index to examine the strength of semiconductor stocks. TXN and NVDA are the two stocks that standout in this comparison (see Chart 4). A two hour chart of Texas Instruments shows that it has been rallying strongly. (The time period of the analysis is much longer than the 10-day period in Chart 2 for Charts 3 and 4).
Chart 3: I jointly compare the relative strength (on the X-axis via SCTR) to the absolute trend strength (on the Y-axis) using the Chande Trend Meter (CTM). The stocks above the X-axis have stronger absolute trend strength than the $SPX index, which is at (0,0). The stocks to the right of the Y-axis have higher relative strength than the market. Thus, the strongest stocks are in the upper-right hand quadrant, and the weakest stocks are in the lower left-hand quadrant. TXN is stronger than the $SPX on a relative and absolute basis.
Chart 4: I jointly compare the relative strength (on the X-axis) to the absolute trend strength (on the Y-axis) using the Chande Trend Meter (CTM). The average stock in the $SPX index is at (0,0), since the SPY ETF relative strength is derived by using ETFs rather than stocks. The stocks above the X-axis have stronger absolute trend strength than the average stock, which is at (0,0). The stocks to the right of the Y-axis have higher relative strength than the average strength. Thus, the strongest stocks are in the upper-right hand quadrant, and the weakest stocks are in the lower left-hand quadrant. TXN and NVDA are performing much better than the average stock in the $SPX universe.
Chart 5: Texas Instruments has been strong since the breakout in September.
Three Interesting Charts
Here are three charts from different groups, to show counter-trend and trend-following opportunities. First, another stock recovering from the rotation in to Financials (ESIO). Electro Scientific Industries found support at the gap as we might expect from technical analysis, and has now broken above a down-trend line after consolidating for six weeks. Kohls and TCF Financial have broken above key resistance and are candidates for brute force trend-following analysis.
Chart 6: ESIO found support at the gap, with multiple tests of that support. It is now just testing the down-trend line. A long position with well-defined risk to the gap might be of interest to counter-trend traders. Risks include a pullback in the major market trend.
Chart 7: Kohl's has broken out along with other retailers enjoying renewed interest. Like every new breakout, a retest of the breakout levels will not be surprising.
Chart 8: The rotation into Financials followed by continued interest has led TCF to a breakout that has held after a brief consolidation above the breakout point. Every new breakout is vulnerable to a retest to check if prior resistance can be now become the new support.
Will this market ever pullback?
The tax cut rally has moved with great gusto to new highs, with the last 1000 points coming at perhaps the fastest rate ever in the long history of the Dow. Using the usual technical analysis tools, I can find a cluster of price targets in the 26,600-27,000 range, or say 1.5 to 3% or so above current levels. This is only a guess, and only you can decide if this upside headroom is sufficient to wait for a decent 3-5% pullback. The S&P 500 index is now more than 5% above its 50-day simple moving average, leading to calls for a pause, though the historical record is mixed. Strong trends have continued to move higher even with the $SPX 5% above its 50-day average, and pullbacks over the past 10 years have been shallow, in the 1-5% range, though deeper ones can also be found. A 1000-1500 point pullback would make the professionals happy.
Chart 9: A rough guess suggests a 1.5 to 3% upside headroom is available before a pullback would become more likely, but this is only a guess, and the $SPX is already more than 5% above its 50-day average, triggering calls for a pullback now.
The market is trending well, and market internals are strong, but outside events could always precipitate a quick drop.
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