BASIC MATERIALS LEAD OCTOBER'S GAINS -- CHIPS LEAD TECHNOLOGY RALLY -- BREADTH DIVERGENCES
MATERIALS LEAD OCTOBER'S GAINS... Anyone whose been reading our market messages over the past month shouldn't be surprised to find out that Basic Materials were the strongest market sector for the month of October. Materials gained 9.7% for the month followed by a 9.1% gain in Consumer Discretionary and 7.2% in Technology. Small caps outperformed large caps by a 8.7% to 5.1% margin. The material leaders were tied to rising industrial commodities. Monthly charts of three of the material leaders are shown below. All three have reached multi-year highs and are doing it on rising volume. Basic Material stocks are one way of benefiting from rising commodity prices.
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CHIPS STOCKS LEAD TECHOLOGY GAINS IN OCTOBER... Chips stocks were in the forefront of the technology stocks during October. Three of the chip leaders are shown below. All three reached 52-week highs and appear headed toward the highs reached at the start of 2002. While that's good short-term news, it also suggests that the rallies may run into new selling at those higher levels -- 20 in AMD, 28 in AMAT, and 35 in TXN.
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BREADTH CONCERNS... One of our primary tools for gauging market breath is the McClellan Summation Index for the NYSE and the Nasdaq markets. The Summation Index is a longer range version of the McClellan Oscillator, which is a short-term measure of advance-decline figures. One of the reasons we like the Summation Index is that is often gives more reliable clues to market breadth than the traditional advance-decline line. Right now, the Summation Index numbers are giving some cause for concern. The chart below compares the NYSE Summation Index to the NYSE Composite Index for the last two years. A rising Summation Index is good -- a falling SI is bad. The SI hit bottom at the end of July 2002. When the market dipped to new lows last October, however, the SI gave a bullish divergence by staying over its summer low. That turned out to be a good signal of a market bottom. The market decline into this March saw a third rising bottom in the SI, which was another bullish sign. Which brings us back to the present. The NYSE SI peaked this June. Even though the market is close to a new high, the SI is still well below its June high. That's a potential negative divergence -- if it continues much longer. The Nasdaq SI also peaked during June. While that may not have much effect on the short-term market direction, it is serving to keep us somewhat cautious in our market view.
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2003 MODEL UPDATE... A glance at the lastest MurphyMorris Model Update shows the condition of some of our other technical indicators. [The October 30 Model update can be accessed from the yellow box in the upper right corner of the MurphyMorris.com homepage]. One of the areas of concern is that the NYSE is now showing better relative strength than the Nasdaq. That's usually a caution sign. It also means that we use NYSE figures for our indicators. Chart 1 shows the negative divergence in the NYSE Summation Index referred to in the previous paragraph. Chart 2 shows that the NYSE High-Low Indicator (although positive) is well off its June high. That's a potential negative divergence. The good news is shown in the last chart, which shows the NYSE staying over a rising 50-day average. Our trend-following indicators (like moving averages) are still pointing up. However, some of our momentum breadth indicators are suggesting that the market is advancing on thinner footing.
