SOX Found: Is a Major Upswing In the Works?

Includes: SMH, SOXX
by: Philip Davis

I feel like I have been looking for my SOX all year and we finally found them. Turns out they were in the last place we looked (by the way, everything is in the last place you look because when you find it, you stop looking!) as every other index gave us positive indicators 2 weeks earlier.

If we get the same kind of breakout on transports (another 100 pts) we could be seeing a new all-time high for the Dow and S&P.

I don't generally watch the Russell but it's a valid indicator and happens to be sitting just under its 200 dma at 713 so I'm going to be keeping an eye on that, as well as the Nasdaq 2,150 for my breakout indicators.

I don't expect the S&P to break 1,300 until the oil sector bottoms out as oil still makes up 15% of the S&P. We never really care what the Dow does but the headline number is critical to market psychology so we need it to hold 11,300 to keep the party going.

If we can break up out of these levels (bad news if we don't by the way) then we may have one of the best Augusts in market history. Why? Because nobody believes in this rally! This is a graph of the Dow's Bullish Percent Indicator which shows that this rally is happening despite the fact that 47% of the traders are still bearish on the market!

That's nothing compared to the Nasdaq though where sentiment is a shocking 70% bearish.

What happens when those traders get off the sidelines?

The last time the Nasdaq was this bearish was August of 2004, when the index bottomed out at 1,750 from which point it went on a 4 month 400 point rally.

Back in that same period, the Dow went from 9,800 to 10,800 but, unlike the Nasdaq, it experienced a serious pullback along the way.

This rally came in the face of the initial rounds of Fed tightening as well...

So while I remain cautious that world events can quickly throw us back into an annoying range, I also see the potential for one of the great rallies of the 21st century!