PROFIT-TAKING IN CHIPS COINCIDES WITH BOTTOM-FISHING IN DRUGS
SOX IS OVERBOUGHT SHORT-TERM... The Semiconductor (SOX) Index is the down 3.9% today and is the weakest part of the technology sector. That's due mainly to a short-term overbought condition as reflected in Chart 1. After recently hitting a new 52-week high, the 14-day RSI line for the SOX is turning down from overbought territory over 70. That's not too surprising given the size of the recent rally. The first support level to be tested will be the 20-day moving average which is now at 438. If that doesn't hold, more substantial support is likely near the (blue) 50-day average which coincides roughly with the peaks along the June/July highs. That should be sufficient to contain any additional selling. Two of the most-active losers in the SOX today are Micron Technology and Texas Instruments. They're also the two biggest percentage losers in the S&P 500. MU is slipping under its 50-day average after failing to get through its July high. TXN is gapping down from a short-term overbought condition. Its 20-day average sits at 22.78. While the chips are under pressure, drug stocks are bouncing.
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DRUGS ARE BOUNCING FROM OVERSOLD CONDITION... The AMEX Pharameutical Index is up 1.3% today and is one of the market's strongest groups. As the chart shows, the DRG is bouncing from an oversold condition and has climbed back over its 50- and 200-day moving averages. The daily MACD lines have also turned positive. Two of the most-actively traded drug gainers today are Schering Plough and Pfizer. Chartwise, neither one looks especially strong. It's not unusual for the drugs to bounce when the chips correct. That's because they often move in opposite directions. When the market is optimistic, it buys chips and sells drugs. When it turns cautious, it sells chips and buys drugs -- as it's doing today.
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SOX/DRUG RATIO MEASURES MARKET MOOD... The SOX represents a growth part of the market. Investors buy the chips when they're optimistic about the market's direction. The drugs are defensive in nature. They're mostly ignored when the market is strong; they get bought when investors are more pessimistic. That's why they often trend in opposite directions. The chart below plots the SOX/DRG ratio. The ratio bottomed last October and just recently hit a new 52-week high. As the chart also shows, however, the RSI line has moved into overbought territory over 70 and the daily MACD lines have turned down from the same level reached last December. That suggests a short-term rotation out of chips and into drugs. The major trend of the ratio, however,is still up. That means that the current pullback in the SOX -- and the bounce in the DRG -- are just corrections to existing trends. The longer-term picture still favors the chips over the drugs.
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