Let's begin with a simple premise: The reason investing is difficult is because the market constantly changes the key to the locks. Just when something begins to seem reliable, it pummels investors into oblivion while wiping their tears with a steel scrubber. Put simply, the market inherently sets traps that investors are all too willing to fall into.
Recently it seems that the market is setting a new trap for investors who have come to rely on the SOX as a proxy for market leadership. Let's be clear before proceeding so as not to mince words, the SOX is one of the most reliable proxies for market leadership out there. It works time and again for judging the voracity or flaccidity of a market rally or emerging reversal.
However, the SOX can also be subject to "lock changing" dynamics, whereby its usefulness becomes compromised. Recognizing these points of compromising utility for an indicator of value is an important insight to gain, as it not only preserves precious basis points of outperformance, but can aide in creating extraordinary results.
Investors are facing a moment in time here where it is easy to look at the SOX, notice its hot performance over the past couple of weeks, coming to the simple conclusion that this means the markets are getting set for an upside explosion. After all, the SOX always leads, right?
Not necessarily. There are also times when a leading indicator of market voracity will waste all of its energy attempting to lead the markets into paradise, only to have the markets shrug off the effort. The wasted ammunition of this attempted push eventually cycles back, creating a negative mechanism that proves highly counter-productive over the short-term.
The wasted effort of the SOX to push the markets forward needs to be considered here just as much as its propensity to lead the markets. If the Nasdaq, especially, refuses to acknowledge the SOX's diligent work, then the resulting rebellion on the downside will be a heart-rending moment for the bullish camp.
Time is of the essence. Giddy up.
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