Morning Comment: A look at the chip stocks....and gold.


A big bounce in the bank stocks created a very strong reversal in the broad stock market yesterday…and helped the S&P 500 rally 3% off of its early morning lows and close more than 1% higher on the day. The internals for the day didn’t look particularly good if you look at where things closed, but that was a little misleading. For instance, the volume fell about 7% and the breadth was not particularly impressive. (It was 3 to 1 positive for the S&P 500, less than 2 to 1 positive for the NYSE Composite index…and slightly negative for the Nasdaq Composite.) However, even though the composite volume was lower, it was still well above its average daily volume of the past few weeks. Also, even though the breadth wasn’t very impressive for a day when the major averages rallied more than 1% (especially the breadth away from the S&P 500 index), it improved dramatically from VERY poor readings in the first hour of trading.

In other words, yesterday’s bounce in the stock market was still a good one…and thus one should not be dismissed as a one-day wonder. However, whenever we see a decent sized reversal in the stock market, we always look for similar moves in other markets. When we don’t see the same kind of reversals in those other markets…or least a delayed move the next day…it raises our skepticism about whether the reversal is something that will have legs.

Yesterday, we did not see much of a move at all in the Treasury market. In fact, the last time we saw such a tight one-day range on the U.S. 10-year yield was over a month ago. The same can be said about the DXY dollar index. We DID see a nice pop in crude oil, so that was positive, but the price of gold rose nicely and is now close to testing its highest level in nine years.

In other words, even though we saw a bounce in crude oil, the fact that the Treasury market did nothing and gold rallied strongly leads us to be skeptical about yesterday’s bounce in stocks. Remember the fall in Treasury yields and the rise in gold in January and the first half of February were clear leading indicators for a sharp drop in stock prices that started later in February. (BTW, gold’s retest of the April highs is bullish for the yellow metal…and any further upside movement should confirm that the next rally leg has begun…and it should take gold back towards it all-time highs above $1,900 very quickly.)……….(First chart below.)

In the tech area yesterday, the chips stocks had a great day…with the SMH semiconductor ETF rallying more than 5% off of its early morning lows and closing at its highs for the day. It also just missed out making an “outside-up” day. HOWEVER, the SMH is trading 3% lower this morning on the news that the U.S. will block shipments of semiconductors to Huawei. This, in turn, has led China to say that they may restrict or investigate U.S. companies. In other words, the tensions with China have been escalated a bit more.

Today is an expiration day, so anything can happen, but the stock market needs the rally in the tech sector to broaden out if the S&P 500 is going to take another run at 3,000. Since the chip stocks have been such a KEY leadership group for the tech sector and the stock market in general for such a long time, whichever way this group moves going forward should be important.

Therefore, we’re watching two levels on the SMH. On the support side of things, the 200 DMA has been solid support over the past 4-6 weeks. So if it breaks below that line in any meaningful way, it will be a bearish development. However, if it can bounce off of that line once again…and take out its recent highs (of $140) in a meaningful way, it should help this key group within the tech sector to play catch-up with the mega-cap tech stocks. THAT would be quite bullish. (Second chart below.)






Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on May 15, 2020 — 8:05 AM
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