MONEY ROTATES FROM TECHNOLOGY TO HEALTHCARE -- COMMODITIES CONTINUE TO CLIMB -- OIL ON VERGE OF BULLISH BREAKOUT
NASDAQ 100 LEADS FRIDAY DECLINE... A glance at the stock table on the Stockcharts.com homepage shows that the Nasdaq 100 lost 2.2% on Friday to lead the end of week selloff. That decline contributed to a 1.9% drop in the Nasdaq Composite, which made it the weakest of the major stock averages. Loss of leadership by the Nasdaq has been one of the major factors turning me more cautious on the market over the past couple of weeks. It's more difficult for the market to rise when technology isn't leading. My market message last Monday talked about weakness in weekly Nasdaq indicators and the likelihood for some type of consolidation or correction. If anything, this past week's deterioration has only strengthenend that more cautious view of the market. Chart 1 shows Nasdaq 100 Shares (QQQ) traded on the AMEX. Friday's price drop puts the 50-day moving average within striking distance. That's an important support line. Any closing violation would be a more serious danger sign. The daily stochastis lines have turned down from overbought territory over 80. More importantly, the daily MACD lines have stayed negative. I recently wrote about the negative divergence between the MACD and the NDX over the past three months. Unfortunately, that's getting worse instead of better. More reason for caution. Another sign that the market is turning more defensive comes from a study of this week's sector performance. A study of the MarketCarpet page shows the week's strongest sectors to be healthcare, energy, consumer staples, and utililities. All four are considered to be defensive groups. The biggest loser was technology. Retail stocks also lost ground this week. Drug stocks were the biggest winners.
Chart 1
JNJ VERSUS WAL-MART... Technology wasn't the only group losing money this week. Friday's performance in the Dow reflected another rotation taking place. The Dow's strongest stock was a drug stock -- Johnson & Johnson. The weakest Dow stock on Friday was the big retailer -- Wal Mart. Charts 2 and 3 show JNJ surging to a two-month high on rising volume. [Merck was another Dow leader this week as drug stocks rose]. Wal-Mart, however, plunged to a three-month low on very heavy volume. Retail stocks encountered profit-taking late in the week. It looks to me like money managers have started to rotate out of former leaders like retail and technology into former laggards like drug stocks. The jump in drug stocks made healthcare the week's top gainers. Energy stocks also benefitted from a jump in oil.
Chart 2
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CRB INDEX HITS SEVEN-YEAR HIGH... Commodity markets resumed their major bull trend this past week. The CRB Index broke through the highs formed during February to reach the highest level in seven years. Chart 4 shows the CRB heading for a challenge of its 1996 peak just over 260. While that may provide some temporary resistance, technical odds favor that peak being broken in time. That bullish analysis comes from Chart 5, which plots the CRB back to its major peak in 1980. Notice the three "fan lines" drawn over the peaks formed during 1984, 1988, and 1996. In chartwork, the breaking of the third "fan line" is a bullish signal. That bullish breakout took place a year ago. The monthly chart also shows that the CRB rally has a long ways to go to reach the levels hit twenty years ago. Precious metals jumped this week as well. Gold prices are testing psychological resistance near $400, while silver hit a three-year high. Wheat led a strong grain group. Even some of the "soft commodities" like cocoa and sugar are rising. The only commodity group that hasn't participated in the commodity rally has been energy. That may be changing.
Chart 4
Chart 5
CRUDE OIL NEARING UPSIDE BREAKOUT... Chart 6 is a weekly bar chart of oil futures prices. It shows a prominent peak during February just prior to the start of the Iraq invasion. [That oil peak coincided with the CRB peak, which was exceeded this past week]. Since March, crude oil has been trading sideways while the rest of the commodity group has been rising. That divergence may soon be resolved with an upside breakout in oil. Crude jumped $l.52 this week and is challenging the highs formed since June. The onset of colder weather may also give a boost to heating oil and natural gas. Needless to say, an upside breakout by oil prices would give an even bigger boost to the CRB Index. It would also give a boost to energy shares. Unfortunately, rising energy prices are often a negative sign for the economy and the rest of the stock market. Given the overbought nature of the stock market at the moment, a sudden surge in oil prices is the last thing it needs. As I've said many times over the past year, commodity markets should remain the strongest asset class for the foreseeable future.
Chart 6
DOLLAR SINKS, BONDS RISE... The short-term bounce in the dollar met heavy selling at its 50-day moving average. It fell sharply against the Euro later in the week. That pushed gold prices to a seven-year high. Rising gold prices are usually associated with lower stock prices. Bond prices rose this week to the highest level in six weeks to turn their short-term trend higher. Bond prices have been trading in the opposite direction of stock prices. This week's upturn in bonds may be hinting at a downturn in stocks.
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