Research Excerpts

3 Reasons For 1 More Leg Higher In US Stocks

Posted on: Monday, June 30th, 2014

Asbury Alerts are one of 8 different reports that we produce for subscribers at various intervals throughout the month.  Their purpose is to provide tactical and actionable investment ideas that pertain to the more strategic investment themes that appear in our Commentaries and other more intermediate term oriented reports.

The following is our May 23rd Asbury Alert, entitled 3 Reasons For 1 More Leg Higher In US Stocks, in it’s entirety to show you a good example of our approach to investing, and how it it helps our clientele of professional investors manage risk and improve performance.

Report: Asbury Alert
Title: 3 Reasons For 1 More Leg Higher In US Stocks
Date: Friday May 23rd, 9:10 am ET


In Monday’s (May 19th) Keys To This Week, we said:

The key takeaway for this week is this: if there is going to be another leg higher within the 2013 advance, it needs to begin from right here between now and month end.

More recently, in our May 20th report entitled Correction Now, Or Another Leg Higher? 2 Key Indexes To Watch., we said:

“…the US stock market is trading at a critical near term decision point from which it is likely to either: 1) begin one more minor leg higher before potentially beginning a corrective decline in the 3rd Quarter, or 2) begin that correction nowA sustained rise above NDX 3617 and/or SOX 583 would suggest the former, that the US stock market is beginning another near term leg higher before a potential corrective decline emerges in the 3rd Quarter.”

The following 3 charts collectively suggest that another near term leg higher is beginning now.

The highlighted area in Chart 1 below shows that the PHLX Semiconductor (SOX) Index broke out higher yesterday from almost 2 months of sideways congestion.  This breakout indicates that the SOX’s larger February advance is resuming and targets an additional 6% rise to 620 that will remain valid as long as the upper boundary of the pattern near 580 now loosely contains the index on the downside as underlying support.

<Editor’s Note: The SOX met our 620 initial on June 9th, to capture a 6% advance in a little over 2 weeks.>

Chart 1

Chart 1

Semiconductors typically lead Technology, and Technology typically leads the US broad market, so as long as this pattern remains intact it will also be seen as being indirectly near term bullish for the S&P 500.

Yesterday’s bullish breakout in the SOX is especially compelling because it occurred on significantly expanding investor assets in the PowerShares QQQ Trust ETF, which the highlighted area in the lower panel of Chart 2 below shows have now moved back above their 21-day (1-month) moving average for the first time since March 13th.

Chart 2

Chart 2

As long as these assets continue to expand/remain above their moving average, we will view it as an indirect indication that there is enough near term bullish conviction by investors for the SOX to meet its 620 target.

The highlighted area in the lower panel of Chart 3 below shows that, as the SOX is breaking out higher from 2 months of sideways congestion on expanding investor assets in the QQQs, the S&P 500‘s 1-month rate-of-change (ROC, the percentage change between the most recent price and the price 21 day ago) has been positive (bullish) since April 22nd and is now testing its zero line from above.

Chart 3

Chart 3

This means that SPX must begin to rise from right here in order to keep near term market momentum positive (bullish) as it did on October 8th and December 18th 2013, and most recently on April 11th (green vertical highlights between both panels).  A negative shift in the ROC would indicate that a pullback/correction is beginning in the US broad market index, as recently occurred between January 23rd and February 20th (red highlights).

Conclusion, Investment Implications, Strategy

The near term inflection/decision point for the US stock market that we have identified and have been discussing for the past several weeks appears to be resolving itself to the upside this week, which targets an additional 6% rise in the market leading PHLX Semiconductor (SOX) Index before a US broad market pullback/correction potentially emerges during the 3rd Quarter.

As long as the SOX remains above 580 on expanding investor assets in the PowerShares QQQ Trust ETF and a positive 1-month rate of change in the S&P 500, our currently positive near term bias for the US stock market will remain intact.

Since that report, the S&P 500 rose by 76 points or 4% into the 1,968 June 24th highs in exactly one month, and those highs were tested again today.

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