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Swiss Cheese Rally Filled With Holes

|Includes: IBM, JJC, VanEck Vectors Semiconductor ETF (SMH), UGA
The major stock indexes have soared higher over the past three trading sessions. Once again, stock indexes are trading higher this morning. Many leading stocks such as Apple Inc.(NASDAQ:AAPL), Google Inc.(NASDAQ), and International Business Machines(NYSE:IBM) have soared to new highs. The problems in Europe seem to be under control for now. Everything looks fine in Mayberry.

There are a few problems with the recent rally that traders and investors should know. First, the stock market seems to rally only when the U.S. Dollar Index plummets lower. We all know that the U.S. Dollar is the worlds reserve currency, however, the more the dollar declines the more inflation is created. Gasoline has been climbing sharply higher since June 27, 2011. The United States Gasoline Fund (NYSE:UGA) is just three points from its 52 week high. Everyone knows that the consumers in the U.S. cannot handle $4.00 gasoline at the pump.

The second negative factor for this rally is the semiconductor sector. The semiconductors are really lagging the NASDAQ Composite. This is usually a sign of weakness for the markets. The semiconductor sector should be leading the NASDAQ Composite, not lag the tech heavy index. Traders can simply compare a chart of the Semiconductor Holders Trust (NYSE:SMH) with the Powershares QQQ Trust (NASDAQ:QQQ). It is obvious and easy to see how the semiconductor sector is still very weak, that is not a sign market strength.

Another problem for these markets is copper. Copper is one of the most important commodities in any rally. Strong copper represents growth in construction. We all know that growth is not taking place in the United States and Europe, however, growth is taking place in Asia. The Chinese and Indian economies have been the strength for copper. Asia is clearly starting to slow down now. Just look at the Chinese data last night, Chinese manufacturing is beginning to slow. Chinese growth is more important than anyone realizes at this time. Last night, the Shanghai Composite traded down by more than 1.0 percent. If the Asian markets slowdown investors better watch out.

These are just a few of the obvious signs that traders can see as major headwinds for the markets. There are many more reasons for the coming weakness such as the poor action on the financial stocks, more European problems on the horizon and the weak trading volume. Stay tuned as this rally may not have much more strength left in the tank. This is a traders market and it should be this way for the remainder of 2011.

Nicholas Santiago