In last week’s Market Outlook, I said that even though the short term still looked risky, the tide was turning in favor of the bulls. That remains the case as the U.S. stock market put in another good performance last week.

#-ad_banner-#The across-the-board gains in the major indices were led by the tech-heavy Nasdaq 100, which added 2.1%. Moreover, through Friday’s close, this market-leading index has gained a whopping 350 points, or 8.3%, since the bottom of the Brexit sell-off on June 27. Despite this strength, however, the market still has one more big obstacle to deal with before it is out of the woods, which I will discuss in just a minute.

Last week’s broad-based strength was also very apparent at the sector level, as all sectors of the S&P 500 finished with gains except for energy, which lost 1.3%. The rally was led by consumer discretionary (2.2%) and health care (2.1%).

Tech Bellwether Also Points Higher

In last week’s report, I reminded readers that the mid-April breakout in the bellwether Dow industrials targeted a 14% rise to 20,400. I also said the late-June retest and rebound from the upper boundary of the indecision area near 17,446 established a new potential intermediate-term buying opportunity with good risk/reward characteristics. The Dow gained another 1.1% last week, finishing Friday’s session at 18,147.

The chart below shows a similar breakout recently occurred in Texas Instruments (NASDAQ: TXN). I am particularly interested in this stock because of its long-term positive correlation to both the S&P 500 and Nasdaq 100.

Last week, TXN tested and held the upper boundary of the previous indecision area at $59.39. As long as that level holds as support, the new pattern targets a move to $75.50, which is 19% above Friday’s close.

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Market Must Exceed 2015 Highs

As I mentioned above, as we headed into this week, there was still one more major obstacle for the market to overcome: resistance at the 2015 all-time highs in the S&P 500 (2,135) and Dow Jones Industrial Average (18,351). 

The S&P 500 actually broke out to a new all-time high on Monday, but don’t celebrate just yet. It would take a sustained rise above both the S&P 500 and Dow’s highs to indicate the market is establishing a new intermediate-term trading range, which is imperative to meet our upside targets in the Dow and TXN.

Lack of Bullish Conviction Warns of a Peak in Treasuries

In the June 27 Market Outlook, I pointed out that the yield of the benchmark 10-year Treasury note was testing its 116-year closing low of 1.55% to 1.51%, and said it was clearly a secular inflection point for long-term interest rates. Although being long U.S. 10-year bonds has paid off very well so far this year, my fear has been that once the stock market finds a bottom and starts to attract investors away from defensive Treasuries, bond prices could fall even faster than they have risen. The next chart exacerbates my fears.

This chart plots the SPDR Barclays Long Term Treasury ETF (NYSE: TLO) in the upper panel, with its corresponding total net assets in the lower panel. TLO tracks the Barclays Capital Long U.S. Treasury Index, which includes all publicly issued U.S. Treasury securities that have a remaining maturity of 10 or more years. I use the 21-day moving average of the total net assets to help identify trends of monthly expansion or contraction.

Expanding investor assets between the start of January and Feb. 11, and from March 11 to April 7, fueled advances in TLO. The chart also shows that the most recent rise in TLO off the late-May lows, occurred amid flat total net assets. This indicates the rally was triggered by investors fleeing riskier assets for long-dated Treasuries intraday, but wasn’t supported by investor conviction associated with holding those positions overnight.

The lack of bullish conviction in TLO’s move to new highs makes it, and the long-dated Treasury prices it represents, particularly vulnerable to a sharp decline. As long as asset flows in TLO remain flat, Market Outlook readers should consider taking an aggressively defensive approach to their holdings in related assets.

Steel Shows Continued Strength

One of my recurring themes during the first half of 2016 has been the slow but steady strength in the commodity space. In last week’s Market Outlook, I looked at an emerging bullish breakout in the Van Eck Vectors Steel ETF (NYSE: SLX), saying it targeted a 16% rise to $33 that would remain valid as long as the upper boundary of the indecision area loosely contained prices as underlying support.

Following a retest of the upper boundary on Wednesday, SLX rose to $28.73 on Friday — its highest level since May 3.

This clears the way for a retest of the $30.74 April 20 high. If SLX exceeds that level, it would set the stage for a run to my $33 target later this quarter, which is 15% above Friday’s close.

Putting It All Together

In the June 27 Market Outlook, I said the Brexit-fueled spike in investor fear suggested a buying opportunity may be right around the corner, especially since Britain leaving the European Union did not seem likely to put a big, sustainable dent in U.S. GDP. Two weeks later, this potential buying opportunity is looking more and more legitimate, as both the Dow industrials and Texas Instruments build legitimately bullish chart patterns. These patterns portend much higher U.S. equity prices over the next one to several quarters, while both the Dow and TXN offer good risk/reward characteristics from current levels.

The key over the next several weeks will be the Dow’s ability to exceed its 18,351 all-time high, and for the S&P 500 to remain above its 2015 high of 2,135.