In this article, Mish Schneider, director of trading research and education at MarketGauge.com, considers to what extent investors are moving into retail and transportation stocks.
Wednesday was another disappointing day for the market, as many short-term buyers from Tuesday got flushed out in the move lower.
However, with a second down day should we be worried about a potential correction or is the market still holding its main support?
To answer this, first let us note two important sectors that are holding over major support.
If these can hold their bullish trend it will show that the demand side IYT and the consumer sentiment side XRT (of which GameStop [GME], pictured, is a major holding) still have investors’ support.
Additionally, if more stimulus is expected, these will continue to outperform and therefore boost the major indices.
On the other hand, the iShares Nasdaq Biotechnology ETF [IBB] and VanEck Vectors Semiconductors ETF [SMH] are sitting underneath their 50-DMA.
Though IBB had already broken underneath the 50-DMA late last week, it has continued to move lower.
In the past, we have mentioned that the best way to understand if there is a potential pullback is to wait for multiple key sectors to break their bullish phases.
If SMH is not able to rally back over its 50-DMA on Thursday, it will confirm its entry into a cautionary phase.
This makes Thursday pivotal as we watch for more sectors to break down or hold.
Having said that, the US government will want to appease a rowdy market with its next new stimulus bill, set to come soon.
With that in mind, it is tough to take a bearish stance knowing that there will be underlying support.
Furthermore, the yields which have risen might be dealt with using Operation Twist.
That means that the US Federal Reserve will buy the longer-term bonds and sell the shorter-term bonds thereby, twisting the yield curve back.
This was done in 2011 and 2012, and it did indeed help to stimulate the economy.
The biggest takeaway is that the Fed is not out of tools, and that this rotation from a big tech rally to a more consumer demand/industrial/transportation rally is a good sign for the economy going forward.
This article was originally published on MarketGauge. With over 100 years of combined market experience, MarketGauge's experts provide strategic information to help you achieve your investing goals.