Here's how I Know Recent Market Gains are a Mirage

The markets are coming off a winning week after the S&P 500 (SPY) moved 1% higher powered by a familiar friend - large-cap technology. 

But there was something missing, as one of the more important tech sectors was not only left behind, it dropped more than 7%.  

So, even though, the market wants badly to continue its move higher, recent light volume and choppy price action suggest some razor-thin confidence levels. 

And the fact that this sector is lagging is telling me a lot about the forthcoming slowdown in our economy. 

I took some time to break down all of that and more - including my specific targets and timelines on that aforementioned tech sector. 

The markets are coming off a winning week after the S&P 500 (SPY) moved 1% higher powered by a familiar friend - large-cap technology.  

For the same week, the Nasdaq 100 Index ETF (QQQ) provided the leadership that's been as comforting as a warm bottle of milk for investors since the beginning of the year. But there was something missing, as one of the more important tech sectors was not only left behind, it dropped more than 7%.  

We'll get to that in a minute. 

For the Moment Stocks Have Simply Been Driven Higher by Earnings 

If you ask that average investor what their biggest fear for the market was a month ago, you would have likely heard "earnings season." But so far, that's not the way things have played out. 

With more than 50% of the S&P 500 companies having reported their quarterly results, it feels like all that worry has been over nothing so far. 

According to Factset Research, 79% of those companies have reported upside EPS surprises, along with 74% besting their revenue expectations. This is far better than sentiment felt as we headed into the season.  

Under normal circumstances, we would have likely seen the market shoot 5-10% higher instead of continuing to trade in a range. Maybe this has something to do with the trading action...  

Sector Breakdown 

From a technical perspective, the SPY and QQQ have remained in their respective trading ranges. Last week's small rally put these ETFs into a position to make a bullish break, but there's something missing. 

That technology sector I mentioned in the opening that lost 7% for the week? None other than the Semiconductor stocks. 

That's right, the sector that we should want to have leading the market higher is leading the market lower. 

Companies like Samsung Electronics Co Ltd (KRW) and Western Digital Corp (WDC) set the stage for the week when their reporting indicated dropping demand for semiconductor processing and memory chips. Don't forget that companies like Enphase Energy Inc (ENPH) and First Solar Inc (FSLR) are included in the semiconductor space. Recent weakness in the Clean Energy sector is overflowing into other key areas of the market, as politics and the economy look to slow this once "hot as the sun" sector of the market. 

If the semiconductor sector still has anything to say about it, it's telling you and I that the economy is going to see accelerating signs of slowing in the economy. 

I'm watching the XSD closely, as it is one of the few major ETFs to fall below its 200-day moving average (MA200). The last time we saw this was in December 2022, as the semiconductors were trying to break back above $190. 

This time around, the XSD shares are fighting a bearish trend in their 50-day moving average (MA50). My 4-to-6 week outlook forecasts a $160 price for the semiconductor ETF. 

Another Cautionary Thought on the QQQ 

For the last few months, we've watched the top five or six companies in the QQQ become the "safe harbor" for traders and investors. These companies are attracting investments the same way that the Utility and Consumer Staple sectors did in prior bear markets. 

OK, I'll come clean here: It bothers me that people would be going into technology stocks as a safe haven. It just doesn't make sense guys!  

I mean, these companies can trade at three times the volatility of the average stock when things get ugly. But we'll put that aside for a moment and talk about a different risk. 

This area of the market - the large-cap tech stocks - has become the most crowded investment in the market. As you know from your experience at birthday parties growing up, that's never a good place to be when the music stops. 

I think you get the picture. 

Finally, the Financials 

The First Republic Bank (FRC) wild ride looks to be closer to an end, as it was announced this morning that JPMorgan Chase & Co (JPM) would be purchasing assets of the beleaguered bank to avoid it from falling into FDIC receivership. It's not a good look for the regional banks, especially while we're seeing reports from CNBC like this... 

To say that the market has been looking at the banking sector through rose-colored glasses would be an understatement. I mean, even Charlie Munger, the 99-year-old "super bull," is spotting problems in the system the same way I can spot a nickel on the sidewalk from 50-feet away. 

I'm sorry, but even with the 11th-hour deal to keep FRC out of the FDIC's office trash, I just can't switch my posture on the financial stocks. More specifically, I'm talking about the regional bank stocks that are likely to take the brunt of the slowdown risk from the commercial property market that Mr. Munger is pointing out.

For that reason - and many others - I maintain my protective puts on the SPDR S&P Regional Banking ETF (KRE) with a downside target for the sector of $36 over the next 2-to-4 months. 

Wrapping things up for the morning, the market wants badly to continue its move higher, but recent light volume and choppy price action suggests some razor-thin confidence levels. 

Any rallies higher should be met with some level of profit-taking as traders start to think long and hard about the upcoming "Sell in May and Go Away" pressure that, yes, is indeed a thing. Just not as simple as you think it is. 

So, before we put a bow on this thing, here are the ETFs I'm watching this week on the bullish and bearish side of things... 

The post Here's how I Know Recent Market Gains are a Mirage appeared first on Penny Hawk.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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