I hate to sound like a Gloomy Gus, but this rally is in dire need of a deeper correction before I am willing to jump in on the long side.  Another troubling aspect of recent market action is the underperformance of the semiconductors.  In today's post, I will take a look at the relationship between SMH (the Semiconductor HOLDR) and the NDX (Nasdaq 100 Index).

In the first chart below, I plotted SMH and NDX in the same window in the March - June 2008 period.  Notice how SMH (black line) began to outperform NDX (red line) just before the market rallied in March 2008.  Following that 'signal' that a rally might be brewing, SMH and NDX rallied together until they simultaneously topped in May 2008.   Following that top, SMH began to sell off while the NDX pushed out to one final high in June.    The failure of SMH to trade higher with NDX signaled the end of the rally.  One more telling feature of this chart is the MACD cross lower in May, signaling the end of the push higher for SMH.



Now fast forward to today.  Notice the outperformance by SMH just prior to the beginning of this current rally.  Following that, SMH actually outperformed most of the way higher as it traded in synch with NDX once again.  Notice though, after NDX and SMH topped last week. SMH is beginning to diverge.  In today's trading, for example, NDX was up 1.5% while SMH was up just 0.15%.  This is not healthy behavior and is something to keep an eye on in the near future.  




I am not saying that this rally will fail and send us to new lows.  I am simply saying that a correction is sorely needed and I will be watching how the market behaves during the pullback to determine if I want to put new longs on or not.  We could set a higher low compared to the March low and move higher, or we could plunge to new lows.  I will keep watching the market for clues as to how this will play out.