TECHS LEAD MARKET RETREAT -- HOMEBUILDERS CRUMBLE -- ABBOTT LABS, CAPITAL ONE, AND SOUTHWEST AIR ADVANCE

NASDAQ LEADS DECLINE... Pulled down by a 5% drop in the Semiconductor (SOX) Index, the Nasdaq market lost 2.6% today to lead the rest of the market lower. Some bottom-fishing was seen in the defensive drug stocks. [Please see our mid-day update on chips and drugs]. Small-cap stocks also suffered bigger losses than large-caps. That means that the recent upside leaders suffered the most profit-taking. Volume figures were mixed. The Nasdaq fell on lighter volume, which is a good sign. However, the big board fell on heavier volume. Breadth figures for the Nasdaq were negative by a 3 to 1 margin, which isn't good. Chart 1 shows where the short-term problem is coming from. Along the top, the 14-day RSI line has been in overbought territory over 70 and fell beneath that level today. That's usually a sign of a short-term market top. The MACD lines are still positive, but are up against the highs reached in the spring and summer. The first line of defense is the 20-day moving average, which is presently at 1791. That may be tested in the days ahead. The major uptrend is still intact. However, the fact that we're in the seasonally dangerous September/October period (and the approach of September 11 tomorrow) may be contributing to nervous selling.

Chart 1

HOMEBULDERS FALL ON VOLUME... We've warned several times that rising rates were going to hurt homebuilders. And they have. Charts 2 and 3 show Centex and KBH falling on heavy volume today. Both homebuilders appear to be headed toward their 200-day moving averages. Their falling relative strength lines also show that the group has lost favor with investors since the middle of June (when long-term rates started to rise).

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SOME WINNERS... Healthcare stocks bounced today. One of the biggest gainers was Abbot Labs. Chart 4 shows the stocks hitting an eight-week high on rising volume. In the financial group, Capital One gapped up to a new 52-week high on strong volume. In the airlines, Southwest Airlines tested its July high on good volume. Most of today's winners were in defensive parts of the markets like consumer staples and utilities. Bonds also rose today as stocks sold off. Good news for bonds is usually bad news for stocks.

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