What will the market fret about next week, when the Brexit vote is over? Or maybe I should ask what will it cheer about? Either way, we know the market will find something to obsess about because it always does.
And while we get tired of it, it is what markets and market participants do. Folks think this is simply the way it is now, where we beat a dead horse over and over again, but I can recall 20 years ago hating the way we carried on so about Intel's (INTC) earnings or Cisco (CSCO) as if it was the only thing that mattered. (Cisco is part of TheStreet's Action Alerts PLUS portfolio.)
Ten years before that, we obsessed over something else. I think it was M2. This is not new; in fact, I once saw a cartoon in The New Yorker that had a guy behind a desk and over his head was a sign that said something like "Bureau of the Next Number."
So while everyone fusses over Brexit, or perhaps on Wednesday it will be all about the Tesla (TSLA)-Solar City (SCTY) deal, I want to draw your attention to the ratio of the SOX to the Nasdaq Composite. We have discussed this chart before, but not in several weeks.
Here are the basic parameters: When the ratio gets down under 0.125, we find a reason to like the semis. Notice the plunge in this ratio in late August. Sure, someone will point out that everything plunged in late August. But notice the series of higher lows for nearly the last year. This means that the September plunge saw semis outperform Nasdaq. The January plunge saw semis outperform Nasdaq and the February plunge did as well. Even the May pullback saw another higher low from this ratio.
The recent pullback in the market, from early June until last week, saw no letup in the ratio. Notice the way it kept climbing, even though the SOX did pull back?
Now take another look at all those peaks in the ratio. Over the last three years, each time the ratio gets up over 0.146, it tends to stall out and fall. I think it is important to watch this ratio in the next several weeks; it is currently 0.144.
I have had a measured target for the SOX around 730 for quite some time (there is a much longer-term target near 800, but that is very long term). For now, the SOX has not done anything wrong, nor has the ratio ventured into the "red zone," but this is where my attention will be focused.
You might recall about a month ago when I warmed up to Nasdaq for that late-May rally, one of the reasons was the performance of the semis. I think they lead and markets tend to do better when they play along. Just reaching the target or the ratio isn't cause for alarm, but for me it becomes a reason to be more alert for possible failures.
For more market analysis from Helene Meisler, sign up for Top Stocks, published five times a week.