TECHNOLOGY SPDR CONSOLIDATING WITHIN UPTREND -- MICROSOFT HAS ACHIEVED MAJOR BULLISH BREAKOUT -- INTEL IS ALSO SURGING -- THE MARKET VECTORS SEMICONDUCTOR ETF HAS REACHED HIGHEST LEVEL IN MORE THAN A DECADE -- SO HAVE KLA-TENCOR AND TEXAS INSTRUMENTS
TECHNOLOGY SPDR FORMS BULLISH PENNANT AT CHART SUPPORT... One group that has benefited from May rotations out of defensive stock groups into more economically-sensitive groups is technology. As a result, technology is transitioning from a previous market laggard to an emerging market leader. I've written about this before. My April 30 Market Message carried the headline: "Technolgoy SPDR Exceeds April high and Shows New Upside Leadership". Chart 1 shows the Technology SPDR (XLK) consolidating in a "pennant" formaton over the last two weeks (see converging trendlines). [A pennant formation is a short-term consolidation pattern that is marked by two converging trendlines]. During an uptrend, a pennant is a bullish pattern. Note also that the XLK has bounced off chart support formed along its September peak. That's also a good sign because a broken previous resistance level (September peak) should function as new support below the market, which it is doing. That's why the red resistance line has turned into a green support line. The gray area plots the XLK/SPX relative strength ratio. After falling for six months, the relative strength ratio turned up at the start of May (up arrow). That has put technology in a leadership position.
(click to view a live version of this chart)
Chart 1
MICROSOFT ACHIEVES MAJOR BULLISH BREAKOUT ... Three big technology stocks have played a big role in the XLK upturn -- Apple, Intel, and Microsoft. My April 25 message carried the headline: "Apple has had a lot to do with technology underperformance -- The stock, however, is in a potential support zone and oversold". The bounce in Apple since then has helped support the technology ETF. [Apple is the biggest holding (13%) in the XLK). Another stock featured in the April 25 message was Microsoft. The trend in Microsoft also has a big influence on the technology ETF because it's the second biggest XLK holding (8%). And the trend is good. The monthly bars in Chart 2 show Microsoft having cleared its 2007 peak to reach the highest level in thirteen years. Its relative strength line (green dashes) also turned up during May.
(click to view a live version of this chart)
Chart 2
MARKET VECTORS SEMICONDUCTOR ETF HITS 11-YEAR HIGH ... The April 25 message also showed the pending upside breakout in the Market Vectors Semiconductor ETF (SMH). The monthly bars in Chart 3 show the SMH having reached the highest level 2002. The green line is a relative strength ratio of the SMH divided by the XLK. That measures the performance of the semiconductor group versus the entire technology sector. The SMH:XLK ratio turned up sharply during May. That means that semiconductors are helping lead the resurgence in technology.
(click to view a live version of this chart)
Chart 3
INTEL SURGES AND SHOWS NEW LEADERSHIP... Intel is also in top ten weighting of the XLK. More importantly, it's the top weighting in the Market Vectors Semiconductor ETF (8%). And the big tech stock is surging. The daily bars in Chart 4 show Intel (INTC) climbing to the highest level since last August (on rising volume). Its relative strength ratio bottomed during April (versus the S&P 500), and is has now reached the highest level in nine months. That's good for both the SMH and the XLK (not to mention the rest of the market). Other chip stocks are also doing a lot better.
(click to view a live version of this chart)
Chart 4
KLAC AND TEXAS INSTRUMENTS ACHIEVE BULLISH BREAKOUTS... The April 25 message carried the headline: "KLA Tencor and Texas Instruments near Major Upside breakouts". Charts 5 and 6 show both semiconductors stocks having since achieved those bullish breakouts. Both stocks are now trading at the highest level in more than a decade.
(click to view a live version of this chart)
Chart 5
(click to view a live version of this chart)
Chart 6
BANKS OUTPERFORM HOMEBUILDERS WHEN RATES RISE... Last Thursday's message suggested that the recent jump in bond yields could be a short-term negative for homebuilders, but a net positive for banks. Rising rates threaten to slow down mortgage applications (but probably not in a major way). Banks, on the other hand, get a boost from rising bond yields because they're able to charge more for loans. Chart 7 tries to show that relationship in a more graphic way. The green line shows the recent jump in the 10-year T-Note yield to the highest level in a year. The black line is a ratio of the Bank Index (BKX) divided by the Housing Index (HGX). Although both markets have risen over the last year, homebuilders did better than banks until the start of 2013. That's shown by the falling bank/housing ratio during 2012. The ratio bottomed, however, during January when the bond yield jumped to a nine-month high. The bank/housing ratio jumped even further during May when the bond yield reached the highest level in more than year. That appears to confirm the idea that banks are in a better position than homebuilders to withstand an increase in bond yields.
(click to view a live version of this chart)
Chart 7
JAPANESE STOCKS RETRACE STRONG GAINS... The Japanese stock market, which had been the world's strongest market during 2013, took a 15% hit over the last week. That has raised questions about whether its bull run is over. I doubt it. Chart 8 plots the WisdomTree Japan Hedged Equity ETF (DXJ), which has been the most popular way to play the Japanese rally. [That's because the DXJ hedges out the negative effect from a plunging yen]. Since last November, the DXJ has gained 70% which is unsustainable. In addition, the 14-week RSI (above chart) reached an extremely overbought reading of 90 during April. A downside correction from there isn't surprising. Neither is the extent of the pullback. So far, the DXJ has retraced 38% of the 2013 rally, which is well within the norms of a downside correction. A 50% retracement would put its closer to 42, which isn't too far from the 2009 highs which should now act as a support level under the market. So far, the downside correction in Japan is not unexpected, nor unusual. Nor is there enough evidence to suggest that its bull run is over. Another buying opportunity will most likely present itself in the near future.
