It was a choppy earnings season but despite its volatility the bull trend remains very much intact.
The Dow Transports and Dow Industrials both are trending upward with higher highs and higher lows and both indices are in congruence. (Though it must be noted that the Transports Index is significantly stronger than the Industrials). In addition The VIX remains at historically low levels and the Advance/Decline line shows no sign of any technical stress what-so-ever.
Despite this strength there are some specific areas of weakness.
One sector experiencing difficulty is technology. It would appear the gloss has definitely come off silicon valley. Review the charts below of Facebook and Twitter. This weakness is asking questions of this industry going forward. If a solid recovery is safely in place these media poster-boys should be “booming”. The chart evidence presented proves they are not. I think the issue here is overvaluation and the inability of future income streams to validate exorbitant P/E ratios.
This technological weakness is not company specific. The NASDAQ is indicating real technical weakness. The chart below of the QQQ’s shows that the index is hovering about its 100 daily moving average. If the price action breaks below this important average and then fails to consolidate around the 200 daily moving average (which is only 5% lower), it will be very worrying for the sustainability of this bull market, long term.
Another area of weakness is bio-tech which has technically entered a bear trend. While there has been a 15% retrenchment from previous highs in the bio-tech ETF: IBB, I still anticipate further correction.
As suggested in last month’s brief the consumer staples sector (ETF: XLP) has had a positive season. This I believe is due to rotation by astute money managers into markets offering earnings consistency. The consumer staples bear trend, which began last autumn, is definitely over.
In the general “blogosphere” for the past 2-3 months there has been numerous stories heralding the “collapse” of the American real estate market. While these articles make for interesting reading they are somewhat sensational. The market confidence in this sector remains strong as can be observed by reviewing the Dow Jones Real Estate Index Fund ETF: IYR below. This year this ETF is up 11% and technically the trend is powerful. I think this is one of the reasons the FED is continuing with the QE tapering policy. I think Janet Yellen and her team are genuinely confident the recovery has legs. Of course should this strength become too robust it will call into question the continued low interest rate environment.
Of course when that mantra begins to be played out in the media all bets concerning future market trend will be off ,from my point of view. But that is a discussion for another day.
Dow Jones Transport Index: Daily………………………………..
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