While the market (as measured by the S&P 500) has not progressed much since mid-April, my weekend review found the market internals constructive. As the market consolidates around a center point such as 4200, it builds a lot of energy for an eventual, significant move. Though the direction is not readily discernable, it is reasonable to conclude that the market will move toward the prevailing trend, which currently points higher.

This morning, oil is hitting new post-pandemic highs, and we will see if the higher auction prices are accepted by traders today. That would bode well for the XLE (Energy ETF). While interest rates have been behaving of late, some inflation reports mid-week, not to mention the monthly employment report on Friday, have the potential to rock the boat. Higher rates will benefit the XLF (Financial ETF). If both the XLE and XLF are moving higher, that boosts the IWM (Russell Small-Cap ETF). The IWM has significant exposure to energy and financials.

Meanwhile, the SMH (semi-conductor ETF) has been moving up nicely from a three-month consolidation. Semi-conductors can be an excellent leading economic indicator, just as transports tended to be in the past. Nevertheless, I still think semi-conductors and technology (e.g. the NASDAQ 100) are good candidates for a trading range when they reach their prior peaks. Only time will tell.

Gold, copper, and silver have been moving higher out of consolidations, with gold breaking its recent downtrend. I am keeping an eye on FCX (Freeport-McMoran) as a proxy for copper and GOLD (Barrick Gold) as a proxy for gold. The relative strength (vs. the S&P 500) has been there for FCX but is still somewhat anemic for GOLD. I am not interested in something that does not outperform the market. Gold is also rising at the expense of the U.S. Dollar. The dollar has weakened once again as lower interest rates make it less attractive than foreign currencies. Lower rates are a picture show, however, that is enjoying popcorn at intermission.

Bitcoin has not been around long enough, but I am pondering whether or not it might be a leading indicator in the risk-on/risk-off analysis. Its recent struggles may portend that an intermediate correction will present soon in the financial indices. It had another challenging weekend, remains down 50%, and may have more downside ahead of it. 

Given that we expect an intermediate correction anyway in the 18-month cycle peak, it makes sense to lighten up on risk when presented with good rallies. I am reticent to put on much leverage here and always on guard for liquidation breaks. 

The volume would indicate that we are more likely trading with the weaker hands of the retail crowd at the moment. The institutions may already have hedged their bets. The SKEW – one measure of such hedging activity – index is off the charts – so the demand for OTM puts is at an all-time high – perhaps signaling a “black swan” event ahead. The SKEW has a mixed forecasting record, however, and has remained persistently high all year.