SOX PULLS MARKET LOWER -- RISING OIL PRICE AND FALLING PPI A BAD COMBINATION
CHIP MAKERS FALL ON HEAVY VOLUME... Intel's news that it would cut back on capital spending took a heavy toll on chip equipment makers. Applied Materials was one of the hardest hit. Chart 1 shows AMAT falling under its 50-day averege on heavy volume. Teradyne also fell hard on very heavy volume. TER is threatening chart support along its December lows. Other chip stocks that lost ground were KLA Tencor and Novellus. Weakness in the chip sector helped pull technology down which, in turn, weighed on the rest of the market. [Please see our morning update for charts of Intel and the SOX Index].
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BIOTECHS AND DRUGS BACK OFF FROM RESISTANCE... Biotech stocks have attempted a rebound over the past week. The Biotech Index is, however, running into resistance at its 200-day moving average which is a formidable technical barrier. The Pharmaceutical Drug Index looks even weaker. It tried unsuccessfully to clear its 200-day line throughout January. Today it fell back under its 50-day line.
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ALCOA AND DUPONT LEAD DOW LOWER... Basic industry stocks were also weak today. Alcoa and DuPont were two of the weakest in the Dow. Last week, Alcoa gapped below moving average support on heavy volume. After a low-volume bounce (which met resistance at the moving average), AA fell today on heavier volume. That's not a good pattern. DD broke its 50-day average today -- and is threatening its 200-day line. What bothers us most is the day's heavy trading. It's usually not a good sign when prices fall on heavier volume.
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ENERGY BOUNCES -- APACHE BREAKS OUT... Energy stocks got a boost from higher crude oil prices. While most energy stocks haven't made much upside progress, natural gas stocks have been the strongest part of the energy patch. A good example is Apache, which broke out to a new 52-week high today. The jump in volume the past two days is also encouraging. The weekly chart shows that the 60 level has been a formidable barrier since last April. The next upside target for Apache is the 65-66 region.
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RISING OIL AND FALLING PPI A BAD COMBINATON... The market got two doses of bad news on the pricing front today. One piece of bad news was another jump in the price of crude oil. Another was the weaker-than-expected PPI number. The 0.3% drop in the core PPI number for December (excluding food and energy) raised the old deflation fear. As the day wore on, market analysts interviewed on TV expressed concerned about lack of pricing power and the bad effect that has on corporate earnings. That's why a drop in prices is bad for the market -- not good. The rise in oil -- and the drop in the core PPI -- suggests that the rise in oil prices is more related to war news than the economy. Rising oil prices usually slow the economy. Falling PPI numbers tell us the economy is still pretty fragile to begin with. Neither one is good news for the market.
