SMH Is Flashing An Ominous Warning Sign

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The market’s leading sector, Semiconductors, SMH, closed the week below its prior week after trading at all-time highs.  This is the second week in the last four that this key reversal pattern has shown up.

When this pattern follows through (trades lower through significant support), it can indicate a significant top is in place for at least weeks.

The patterns and our Real Motion momentum indicator with an early cautionary reading are illustrated on the weekly chart below.

The patterns on the daily chart (shown below) have also been warning that SMH needs a break from its rapid ascent.

The most concerning condition is the daily bearish divergence in the Real Motion momentum indicator which was hardly able to trade over its 50-day average (blue) while the SMH closed several times at new all-time highs.

The moving averages of Fast Real Motion are also negatively stacked which typically indicates a resumption of the short-term down trend in momentum combined with price breaking support will lead to a correction in the SMH price trend.

I’m expecting the $600 price level in SMH to be that deciding support level.

The SMH Isn’t The Most Important Factor
In Determining the Health of The Bull Market

The SMH is the leading sector and it carries a lot of weight within the SPY and QQQ, which is what most people will focus on when measuring the health of “market”, but the current market conditions have demonstrated that these indexes could correct without killing the bull market.

In fact, a correction in all three could be a welcome, healthy development for the health of the bull market in the second half of the year and beyond.

Not surprisingly, this potential correction is setting up to happen in July, which is a very common month for corrections and for big trend-resuming breakouts to occur.

The July Factor

July often creates infection points in market trends – indexes, sectors, and stocks. This year, the conditions are ripe for both reversals (SMH) and breakouts in several sectors.

 

**The rest of the commentary will be posted later tonight.

 

 

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Every week we review the big picture of the market's technical condition as seen through the lens of our Big View data charts. The bullets provide a quick summary organized by conditions we see as being risk-on, risk-off, or neutral.  The video analysis dives deeper.

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Summary: Markets remain in a cautiously bullish environment, with improving internals, easing rates, positive breadth, and a strong Modern Family signaling healthy participation beneath the surface despite weakness in the SPY and QQQ. While volume trends, growth leadership, and volatility warrant some caution, the overall evidence continues to favor a modest risk-on stance with supportive seasonality through the end of July.

Risk On

• Markets were mixed with sizable sell-offs in SPY and QQQ, while DIA and IWM were up half a percent, making new highs this week. The SPY closed below its 50-Day Moving Average but within its recent range. Overall a weak risk-on reading. (+)
• Market internals improved for the SPY with the McClellan Oscillator moving back positive and up/down volume, and advance decline all trending higher. (+)
• The color charts (moving average of stocks above key moving averages) are showing positive readings in the S&P and IWM. (+) 
• Rates continued to ease this week. (+)
• The modern family looks strong with a healthy rotation, with strong performance from all members except SMH and IBB and KRE putting in new all-time highs. (+)
• Emerging and developed markets look backed off, though both remain in positive trends and EFA didn’t take out its June swing lows.(+)
• Broader Seasonal trends remain quite bullish for equities through the end of July. (+)

Neutral

• Volume patterns in the SPY and QQQ are weak and diverging from the neutral readings in DIA and IWM. (=)
• Sectors were mixed with technology and consumer discretionary down, while healthcare and consumer staples up, though more sectors up than down overall. (=)
• The 52-Week new high new low deteriorated slightly but held above the midlines. (=)
• Risk gauges remained at 40% with the strength in rates and utilities relative to the SPY. (=)
• The color charts (moving average of stocks above key moving averages) are showing mixed readings for QQQ with the short-term looking weak. (=) 
• Volatility spiked back above its 50 & 200 Day Moving Averages this week before closing back below the 200-DMA. (=)
• Growth lost its bull phase while value continued hitting new highs. (=)
• Soft commodities held above its 200-Day Moving Average, though its in the middle of a long-term trading range. (=)
• Gold is still holding its bullish engulfing pattern, though its trending lower and under all its major moving averages. It is holding support levels from last October. (=) 
• Oil continued to sell off this week. Long-term support is about 10% below current levels. (=)
• The dollar eked out a new 12-month high this week and bitcoin revisited its June lows. (=)

 

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Actionable Trading Plan

Maintain a modest risk-on posture while remaining selective, as improving market internals, easing rates, healthy leadership rotation, and favorable seasonality continue to support the broader bull market despite weakness in the SPY and QQQ. Focus new exposure on areas showing relative strength—including small caps, value, healthcare, and the strongest Modern Family components—while using the SPY's 50-Day Moving Average and recent trading range as key risk management levels, becoming more defensive if breadth deteriorates or the SPY breaks convincingly below recent support.

• Maintain exposure rather than increase aggressively.
• Favor the areas actually leading.
• Watch the SPY 50-DMA as the tactical trigger.
• Tie any defensive shift to deterioration in breadth, not just price.

 

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Keith's Weekly Market Analysis Video