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The Churning Continues

Today's rates rationale makes no sense to me.

The Market

There was an interesting market reaction this morning. Some folks are blaming the market's early slide on comments out of Fed member James Bullard, who was talking up rates. OK, I can buy that. But then why weren't bonds crushed on that news?

I don't know the answer, but if stocks didn't like the chance of higher rates and bonds liked it, I will state right now it makes no sense to me since that would imply that bonds don't care about higher interest rates, but stocks do. If that makes sense to you, then by all means please share your thoughts with me.

In the meantime, while we clawed our way back from the early-morning decline, it did not do much to change the statistics on the day. Breadth was flat, as was net volume. New highs did not increase, which by now should be no shock to anyone. But the number of stocks making new lows did not increase either. New lows had been trending higher over the past week, so this should be jotted down on the positive side of the ledger.

The end result is that we have a market that has been red for three of the last four trading days. Over on Nasdaq, looking at the breadth using the advance/decline line, we've had four of the last six trading days as red. Of course, if you opt to use volume for your breadth on Nasdaq there has only been one red day. So, there has been a lot of churning in the market for the past two weeks, as we discussed here yesterday.

I will continue to monitor the put/call ratio's 30-day moving average that was discussed here in depth last evening. In the meantime, the 10-day moving average of this indicator has turned up decidedly, which typically signals a market in the overbought area. The chart is shown below.

New Ideas

Last night I noted that we would be looking at the Philadelphia Semiconductor Index (SOX) closer for a possible short trade in early July (when I believe the market could head into a more serious correction). I have monitored the ratio of the SOX to the Nasdaq Composite for years and what I have noticed is that when the ratio gets under 13%, the SOX tends to bottom. When the ratio gets up over 14.5%, it tends to top out, or at least go into a period of underperformance.

On the two charts below I have used a red box to show the last six months of 2011 and the first few months of 2012. You can see the ratio hung around that 14% area for most of that time. Now look at the SOX itself. It made very little progress. Sure, it bottomed in October of 2011, but so did everything else. In the end all it did was eke out a higher high and then retreat almost back to the 2011 lows.

The ratio made its first foray into the 14.5% area in June. To me that means the semis should go into a period of underperformance. But there is not a top in sight on the chart of the SOX, especially when we look at the longer-term chart.

I think we can see this rally one more time into early July and then I would begin to look for this group to set up some shorts.

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Elsewhere, we had Intuitive Surgical (ISRG:Nasdaq) as a long several weeks ago, before the stock pushed to more than $380. It had a nice run, but it has spent the last two weeks consolidating. Some might call it a flag. A move up through $412 would give us a next target around $425-ish.

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Today's Indicator

The put/call ratio's 10-day moving average is discussed above.

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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.

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Vantage Energy Services (VTG) appears to trade very thinly, but it does appear to me to be a long-term base it is emerging from. I do not suspect this is a trading stock at all, since it might very well now sit and trade between $1.80 and $2 for some time, especially since it has just had a big run up. I cannot come up with a target either, since it would be a little more than $2, which would not do it justice. In other words, if you want to be in it for the long term, then I'd say as long as it stays at more than $1.75-ish you'd have to consider it will eventually make higher highs.

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The Utilities Select Sector SPDR ETF (XLU) - Get Free Report finds I was dead wrong. You might recall when it dipped to $41.50 I thought we'd have a rally, but I fully expected that rally to be a failing rally and that it would not get over $42.50. Here it is now at a higher high at $43.50. So, I need to reset a target and that target is near $45. The reality is that I don't really trust the Utes to lead, but the chart says it ought to get up to $45 at some point.

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Rite Aid (RAD) - Get Free Report has bounced off support at $7 and now has a lot of resistance at $7.50. If I had a gun to my head, I'd say the chart gets up into the $7.50 area and then pulls back again. If it can hold that secondary pullback (stay over $7) then I might be inclined to like it more for a move up to the $8-8.25 area.

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