The pullback has arrived. I continue to think the market will be like a roller coaster for a while with ups and downs, because we got too giddy in mid-to late-January and that doesn't go away in a few days or even a week.
Remember last week's new high was accompanied by diverging breadth when the cumulative advance/decline line failed to make a new high as well.
The McClellan Summation Index, which tells us the direction of the majority of stocks, not only failed to make a new high, it never even pretended to rally.
The number of stocks making new highs also fell far short of the prior peak when the major indexes achieved new highs on Thursday.
Not much changed on Friday, so I remain in the camp that we should pull back again and get the intermediate-term indicators to cycle back to an oversold condition and sentiment to get less complacent. I do believe the sentiment piece is on its way. I even heard the folks on television express concern on Friday, not to mention the put/call ratio went up. The 10-day moving average of the put/call ratio has lifted off that extreme level, but I think it can still get higher.
But let's talk about the Transports. They failed to make a new high over their all-time high during the January run. But it was at that blue arrow on the chart that we began to hear the narrative that the Transports didn't matter anymore, they were no longer any sort of tell on the economy. No, now it was the Semis - semiconductors. They were what mattered.
Funny thing, though, I haven't head anyone tell us that the Semis are the new Transports lately. It might just be because they did not join the Nasdaq in making a new high last week.
In fact, that chart of the PHLX Semiconductor Sector SOX looks a bit like the chart of iShares Russell 2000 Index (IWM) for the small caps. And we know no one likes the small caps. The narrative on them is that it's OK if they don't participate, because you know, they don't really matter. (Have you noticed there is a theme here, what doesn't confirm doesn't matter, what does confirm, matters!)
I did not put the prices on the charts, so that you can see the pattern without being biased. I hope I succeeded in my effort. But let's turn now to the SOX relative to the Nasdaq. That chart peaked two months ago and is now threatening to make a lower low.
I have always thought that when Semis and banks do well the market is in good shape. They tend to be "early" in their moves relative to the major indexes. By that I mean they bottom before and top before the big cap indexes.
The semis are important, so I will continue to watch for signs of holding -- or not. But quite frankly both groups, the semis and the transports, tell us about economic strength and weakness. I would not discard either one, just because it doesn't confirm my prior view.