Coming into Monday, we wrote targets on the S&P 500 and NASDAQ 100. Based on the measured move from the all-time high and the ensuing gap lower (or topping pattern), we shared with you all that the SPY target was 322 and QQQs target was 260.
And wouldn't you know it? Both landed right there.
Why is that significant? The leaders of the market not only complied with those support levels; the usual suspects went green. Apple, Netflix, Nvidia, Zoom, Tesla, and Microsoft all closed up on the day.
Except for Tesla, all the others have been pandemic stars. Or in other words, tech-in-the-new-world outperformers. However, this is in direct contrast to what many wrote about recently - that value stocks were making a comeback over growth stocks. That certainly flipped course Monday.
To see a more sustained rally, ultimately, we need a couple of signs. The First is what was starting to happen until now, that being that the economic modern family's relative strength must hang in there.
The second sign is in what I continually call the Fed's playground, junk and high corporate yield bonds (LQD). LQD barely budged. Hello Fed and hello growth stocks.
Yet JNK did fall. But, right down to major support. So what's next? The chart I share with you on junk bonds shows the move down to the 200-DMA. It began showing signs of stress last week when it broke below the 50-DMA. Now the key, regardless of what many tech stocks did today, is if junk and the "inside" market sectors can hold on.
The Russell 2000 (IWM) fell the hardest, capping nearly a 4% loss. Regional Banks (KRE) fell over 5%. Granny Retail fell nearly 3%. Same with Transportation (IYT) and Biotechnology (IBB). Sister Semiconductors (SMH), though, fell only about .5%.
So why junk bonds? Because there is the spec market that habitually goes to the tech and chip stocks. And then there is the market risk gauges, which refer to the tech stocks, but base the bias on the overall breadth of the market using these other key sectors like the modern family. Those are now flashing negative.
Junk bonds are sort of the middle ground tell. Last week, the Fed said there is only so much they could do. This week, the stimulus seems to be on the back burner.
So 2 things I am watching. One is junk bonds, so I can ascertain whether the Fed really is done with buying bonds and ETFs. If so, and Powell looks to the government, then I am also watching the political football and at what point the focus goes from justices to stimulus. That is where the economic modern family will be a better gauge. After all, haven't we learned by now that the crowded stocks like the aforementioned are only good for so long without help from the Family?
If the politicos care about the economy and reelection, then expect some announcement in the next 3 days about the stimulus talks going better. Or even a deal. Otherwise (back to junk bonds) if the Fed gives up, not good.
- S&P 500 (SPY): 322 held. Did not fill the gap to 327.97 Friday low. Must fill
- Russell 2000 (IWM): 145.33 the 200 DMA held and now must get back over 150, then 152
- Dow (DIA): 275 key resistance to clear
- Nasdaq (QQQ): 260 held perfectly; however, still under the 50-DMA at 272.90
- KRE (Regional Banks): July low is some support at 34.00 with 37.00 place to clear
- SMH (Semiconductors): Under the 50-DMA at 168.72
- IYT (Transportation): 201 resistance to clear, with support at 189
- IBB (Biotechnology): 132 held but needs to get back over 135.44
- XRT (Retail): 49.30 the 50-DMA failed, but there is still hope there
- Volatility Index (VXX): 27.40 resistance with 24.00 support
- Junk Bonds (JNK): 103.56 the 200-DMA
- LQD (iShs iBoxx High-Yield Bonds): 135.50 support held
Mish Schneider
MarketGauge.com
Director of Trading Research and Education
