It sure feels like a cold dark cloud just washed over the stock market.
Bonds just got slaughtered Wednesday, hammered Thursday and thrown out the window on Friday. Stocks then followed suit Thursday and Friday with sucky price action. If it wasn’t for the bond market fiasco I wouldn’t be so concerned.
S&P 500 Index
The good news is that SPY, S&P 500 index ETF, bounced at support (green line) around mid day and recouped about 1/2 of the day’s losses. The support I’m referring to is the top made in January (SPY 286) prior to the February into April swoon.
SPDR’s S&P 500 Trust Series ETF (SPY) daily
Nasdaq and Tech
Also, QQQ, the ETF that tracks the Nasdaq 100 index just broke 2018 support and settled just above minor support (yellow) that may or may not hold…doubtful. XLK, the technology sector ETF, looks just like QQQ breaking 2018 support and settling just above minor support that probably will get taken out…very soon. Looking a bit further under the hood the semiconductor ETF (SMH) got slammed Thursday and Friday breaking and closing below support from 2016.
Invesco QQQTrust Ser 1 (QQQ) daily
SPDRs Select Sector Technology ETF (XLK) daily
VanEck Vectors Semiconductor ETF (SMH) daily
Semiconductors struggle to get through 2000 highs
One closing week below support does not mean doom for semis and tech but it’s not good either. It is likely the beginning of a technical breakdown as you can see from some of the semiconductor index ETF components. This sector actually looked like it had a chance to break out to the upside a week ago.
What I think is happening with many of the semis is the struggle to get through the old 2000 highs. If we look at some of the component’s long term charts this is quite evident.
Qualcomm Inc (QCOM) monthly
Intel Corp (INTC) monthly
Micron Technology Inc (MU) monthly
Advanced Micro Devices (AMD) monthly
Applied Materials Inc (AMAT) monthly
So, while the broader domestic indexes (SPY, QQQ, DIA, IWM) have support nearby the breakdown of semis is troubling.
In other bad news, there is not much support to stop bonds from falling further. In addition, TLT, the 20+ Year Treasury Bond ETF, has closed below the 115 level I have been discussing all year since support was broken in February (see weekly chart). You can see the violence in the move on the daily TLT chart. Bonds have finally broken out of the range they have been in all year. It was like floodgates opening up; it wasn’t pretty. The next support level is all the way down to 109 and at this point I’m not sure how it won’t get there. TLT has not traded down here since the summer of 2014. One week does not make a market but I’m thinking interest rates are finally going to work their way higher after being range bound all year.
The 10 year yield hasn’t been this high since the summer of 2011. Remember? It was a pretty rocky summer stock market when US debt was downgraded and Europe was having sovereign debt issues. I issued my first and only SPY sell signal that summer on August 15th. I remember writing it.
CBOE 10 Year Treasury Yield Index (TNX–X) weekly
Will bonds lead stocks lower?
So, will bonds lead stocks lower or will stocks lead bonds higher? Right now, it looks like there is a higher chance bonds will lead the way down as there is no real support between now (113.04) and 109. That is a pretty big air pocket.
It wouldn’t be out of the ordinary for SPY to get sucked down into the yellow support area I drew in many months ago before resuming another leg higher. If this rising yellow support zone that price has been trading in from the bottom in February doesn’t hold we will have even bigger problems.
This definitely has my attention and everyone has their eye on SPY 286 again. If that breaks I would expect price to test rising yellow support.
I think it’s time to begin trimming the sails.
VanEck Vectors Semiconductor ETF (SMH) daily
Underperformance, broken support and breaking bad after a year of range bound price action causes me to think this is going lower. It sure had a chance to break out to the upside after compressing all year but after Thursday and Friday that scenario is unlikely, unless this is the fake out of the year. Remember, price action is designed to fool the most of us most of the time. This one is pretty obvious but then again…who’s looking? I’m putting this on the sell list. It’s about a 1% gain from my recommendation on 5/7/18.
I’m not thrilled about my recommendation of Intel Corp (INTC) last Monday after what happened last week with semis but I’m holding off on a sell recommendation to keep a little exposure in the case I am wrong about semis going lower. Also, price is still above support.
iShares MSCI China Index Fund (MCHI) daily
It appears I was wrong on China. Price closed below support and could not carry through on remaining above resistance. It’s about a 5% loss from my recommendation two weeks ago. Sell it.
That’s it for the selling this week.
Interest Rate Sensitive Sectors
In light of interest rates rising a review of interest rate sensitive sectors is probably a good idea.
SPDR S&P Home Builders ETF (XHB) daily
Home builders don’t typically perform well in a rising rate environment although I do remember waiting overnight at a real estate office with about 100 other people to get in a lottery to buy a home in 1981 when interest rates were 14%. Seriously, we camped out in sleeping bags and bought our first home the next morning.
XHB also got crushed last week violating support. Not pretty.
SPDR’s Select Sector Utilities ETF (XLU) daily
I’m a bit surprised utilities performed so well last week closing above resistance considering the big move in rates. Head fake? Hold it for now.
SPDR’s Select Sector Consumer Staples ETF (XLP) daily
I did recommend selling this about a year ago when it broke support. It has since failed to perform well. Staples typically don’t perform well in a rising rate environment. XLP does have a little support under price but my expectation is that this will get taken out and we will see lower prices soon.
SPDR’s Select Sector Financial ETF (XLF) daily
I recommended selling XLF this past July when support was violated. It has made an attempt to gain some traction since but has failed at clearing overhead resistance. Maybe rising rates will give this sector a boost to break out and above it’s trading range for the past year. Look for clearance above $29 to resume glide slope climb.
So, my outlook for stocks in general is one of caution. My caution is more about the bond market selloff than any particular stock price action. I do like our current exposure to energy in XLE, USO and KBR. They have all been not only performing well but out performing the broader market recently. Commodities are also getting bid up as well but more on that later.
Continue to hold open recommendations except for SMH and MCHI…and…
Let’s hope I’m wrong.