News from multiple sources of a slowdown in smartphone sales weighed on the tech sector.

The market run for tech stocks was doing well. Too well. Something had to appear to slow it down. That came from a warning from Broadcom of slowing smart phone sales and a warning from the Nikkei Asian Review saying Apple had cut supplier orders by 20%. The chip sector retreated and dragged the Nasdaq down with it.

This should be no surprise since I routinely chronicle in these pages the relationship between chips and the Nasdaq. In the early week rally, the correlation between the chips and techs was nearly 100% as they moved in lock step. The chip decline began on Thursday as the rumors began to appear. The decline also came at almost an exact double top in the ship sector. We have had these production rumors before and sometimes they matter in the long run, sometimes they do not.

The small caps continue to pull away from the big caps in performance but the Dow made an effort to catch up. The 681-point Dow gain for the week dwarfed the 25-point gain in the Russell but the relative performance gain was 2.8% to 1.5% for the Russell. The small cap index had a good week but the Dow was on fire.

The financial sector helped feed the market rally but the sector is still negative. Paypal, Square MasterCard and Visa are doing fine but the big banks are struggling. We are starting to see some life in JPM, C and WFC but their charts look a lot like the XLF chart below. Until they move over resistance, the charts will remain bearish.

The energy sector turned choppy as crude prices fell but the stocks are holding near their recent highs. We could see some further declines ahead of the June 22nd OPEC meeting but unless they raise production the prices should remain around $70 and that will support long term gains in stocks.

The biotech sector also turned choppy after the ASCO conference last weekend. Some stocks had good news and rose, others had mediocre news and fell. Overall, the Biotech Index closed only 2 points below a two-month high so the sector survived the conference.

The most dramatic comparison of the market is to compare the Russell 2000 small caps to the Russell 1000 big caps. This is the same methodology but different market caps. The Russell 2000 is clearly in breakout mode while the 1000 is still below resistance and well below the prior highs. This is a vivid view of the different in the market leaders and followers.

The A/D line on the S&P blasted off to new highs in the market rally. This is somewhat surprising since the S&P itself has been lethargic. Advancers averaged about 323 per day and decliners 169 for the last week. That is not quite 2:1 but close. The index gains did not reflect that imbalance.

There are still plenty of stocks to buy. The Bullish Percent Index rose to show that only 61.4% of stocks have a buy signal on a point and figure chart. That means there are plenty of stocks that have not recovered from the three months of weakness and the market can move higher as they do.

The number of S&P stocks over their short-term 50-day average improved significantly to 72.6%. This is the highest level since January and suggests the broader market is recovering. The percentage over the 200-day average only reached 64.4% and has a long way to go to recover the January highs at 82%. The rally is just getting started according to these charts.

The S&P is the only chart that really matters this week. If the index can more over 2,790 to a five month high, it will trigger short covering and go a long way towards instilling confidence in investors.

The AAII Sentiment Survey saw an increase in bullish sentiment. I was surprised it was not higher since the Nasdaq decline did not appear until Thursday. Bearish sentiment will begin to implode if the S&P moves over 2,790.

The market appears from a chart perspective to be setting up for further gains. Obviously, this all depends on the headlines next week and there are plenty of chances for a negative headline to appear. I believe we should be cautiously long until proven wrong.

Enter passively and exit aggressively!

Jim Brown

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