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Giddy Up!

Breadth is positive, but sentiment is getting a little excited. Let’s a take a look under the hood and see why I'm watching bonds and the dollar.

The Market

Several weeks ago, I posited that growth stocks should rally. We looked at the semiconductors (with the exchange-traded fund SMH (SMH:Nasdaq)), the mega-cap tech stocks (with the ETF QQQ (QQQ:Nasdaq) and software technology (with the ETF IGV (IGV) - Get Free Report) as places that should bounce. They have since bounced, but Friday it was pretty much all tech. So where does that leave us?

Bonds are probably what’s key here.

Since the lows in March in bonds – for the iShares 20 Plus Year Treasury Bond ETF (TLT:Nasdaq) -- I have thought bonds were in a trading range. For TLT, that means the March low would hold and $140 would keep a lid on it. Back in mid-May – when TLT was $136 – was when I looked for the growth stocks to rally and bonds to stay in the range. Now we are knocking on the door of $140. Two weeks ago when TLT was nearing $140, the Daily Sentiment Index (DSI) was kissing 80-plus, meaning I figured a move over $140 would be a failed breakout, because folks had gotten too bullish on bonds. Yet now the DSI is at 67, which leaves some room to run should TLT break out.

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I also believe the dollar is key. That move down in the buck from early April through mid- to late-May saw commodity stocks have a great run; tech not so much. But what if the buck holds here? What if it is curling under? Then maybe tech can enjoy a resurgence.

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Then there is the fact that Nasdaq itself has not had consecutive up days since May 13-14, but in the last nine trading days Nasdaq’s volume has been positive (up minus down volume). That has gotten the McClellan Summation Index using volume to turn up for the first time since the February downturn.

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We’ve looked at the possible head-and-shoulders bottom (black letters) in the QQQs, and, so far, it has mapped out. It just hasn’t broken out. And even if it does there is still plenty of resistance for it to chew through (thus the blue lettered head-and-shoulders top, which is “penciled” in).

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What is bothersome? Sentiment.

I think it is verging on too giddy. We saw an equity put/call ratio of .37 one day last week. That is the lowest since February. That is far too giddy. I also believe the 10- day moving averages of the equity and the total put/call ratios are likely to make lows this week and curl back up. When they head down, it tends to be market supportive but when heading up, they don’t.

The National Association of Active Investment Managers’ exposure, which was at 44 a few weeks ago, is now back at 83.5. In the past we have seen readings near 100 as extreme, so the runway seems short, but there is some room.

Then there is the DSI for the Volatility Index. It is back to 19, so here too the runway is short because if the VIX falls much more the DSI is likely back in a place that says “enough.”

One final note on sentiment is that my weekend Twitter poll shows 63% looking for more upside in the S&P which is the highest since we saw 68% in early April. Early April was fine for the S&P, not so much for small caps and the QQQ’s peaked about a week later. So I hope you understand when I say that sentiment feels on the verge of giddy.

What I think we should focus on to see if a breakout is not only possible, but if it can have any legs is what is happening “down ballot” from the mega-cap names. Let’s start with IGV. It ran smack into resistance where it was turned back, but has returned the scene of the crime. A move over 365 changes the picture. If it stays under it, then it’s more problematic.

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There is also a little known, and lightly traded, QQQJ (QQQJ:Nasdaq), the Invesco Nasdaq Next Generation 100 ETF. Friday’s rally didn’t take it back to the early week high and it still has resistance in that $33.50 area. If this can’t get going, then that too would be problematic.

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Of course, the market can do what it has done for months and cycle back and forth in a sideways fashion, too.

New Ideas

My old friend Kimberly Clark (KMB) - Get Free Report is enticing me again. It came back to support and held so as long as it stays over $128 I think it is OK again.

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Back in April, I thought the utilities had run far enough and it was time for a correction. I think we’re getting close to the end of the correction. This is the chart of Utilities Select Sector SPDR Fund (XLU:Nasdaq) and I’m a buyer, especially on any move into the $64-$65 area. My “go to” name in the group is always Southern Co (SO) - Get Free Report if you want an individual name.

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Today’s Indicator

The new highs are nothing to write home about and if we get group rotation into tech I don’t expect them to improve.

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Q&A/Reader’s Feedback

Helene welcomes your questions about Top Stocks and her charting strategy and techniques. Please send an email directly to Helene with your questions. However, please remember that TheStreet.com Top Stocks is not intended to provide personalized investment advice. Email Helene here.

Patterson-UTI Energy, Inc. (PTEN:Nasdaq) has a measured target around $12-$12.50. If it pulled back near $9, I would be a buyer but I can’t chase it here.

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Teladoc Health (TDOC) - Get Free Report had one downside target around $130, so that’s complete. It has another unfulfilled downside target around $80. Maybe it never gets there but If it can rally to $170-$180 I’d sell it there.

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I look at the chart of DocuSign (DOCU:Nasdaq) and I see a stock that has gone nowhere for nearly a year. And it has resistance not far overhead, around $240. And even up to $260. The chart looks to me like it is in a giant trading range. For me to think it can breakout we’d have to see Nasdaq and tech in general go on an awesome run—see the discussion above about growth stocks.

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