It is no secret that we became bearish a couple of weeks ago on U.S. stocks. In recent weeks we have spotted several bearish indicators which we documented in Ignore This Series Of Volatility Warning Signs At Your Own Peril as well as 3 Stock Market Indicators Flashing Red. Because of that our first price target for the S&P 500 is 2125 points for fall 2017. This is not a stock market crash for 2017 we are predicting, it is merely a stiff correction.
Today we see another indicator that is flashing red. Typically, stock market leaders tend to do well during bullish periods but they underperform when conditions become bearish.
The two stock market leaders in recent months were semiconductors (SOX) and biotechnology (IBB). Guess what, both are flirting with a breakdown. As that is happening mid-August, with another 8 to 10 seasonally weak weeks in front of us, we believe this is a bearish sign with a high proability of a breakdown.
Semiconductors, as seen on the first chart, are spending an unusally long time period close their support level, see purple circle. That has not happened before: once they got close to support they always bounced strongly. Not so this time.
The point is this: if market leaders like semis fall outside their rising channel they will go sharply lower and it will guarantee a serious correction in broad markets, first and foremost U.S. stock indexes.
Watch the 1060 level in the SOX index.
The other stock market leader, at least since June of this year, is biotechnology. The IBB index (ETF) broke out in June when it crossed 300 points. After a strong rise to the 330 level biotech is falling back to the 300 level now, with a close of the trading day today at 304 points. Once IBB goes below 300 points it will convey the same type of message as SOX falling below 1060 points, see above.
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