CHIPS AND RETAILERS LEAD OVERBOUGHT MARKET LOWER -- SOME MONEY IS ROTATING INTO ENERGY SECTOR
NOT GOOD FOR MARKET WHEN ENERGY IS LEADING... With the stock market looking tired at current levels, it's not a good sign to see energy shares take the top leadership spot for the week. Historically, the stock market tends to sag when the energy sector takes a leadership role. That's what happened this week. The Energy Select Sector SPDR broke out on Thursday to the highest level in six months. It gained more ground on Friday in the face of weak stock market. The relative strength line along the bottom of the chart is turning up for the first time in months. That's good for energy stocks, but not necessarily for the rest of the market. That's especially true given the market's lofty levels. A combination of factors on Friday contributed to nervous selling of stocks. A disappointing jobs report and heavy selling in Intel contributed to some of the stock selling. Some other negative factors were another drop in the dollar to a record low, a jump in gold to $407, and a big drop in bond yields.
Chart 1
BOND YIELDS DROP SHARPLY... As bond prices surged today, yields dropped sharply. The 10-year T-note yield gapped back under its 50-day moving average. That means that some money coming out of stocks today moved back into bonds. I've pointed out many times that bond and stock prices have been moving in opposite directions. As a result, today's bond action suggests that investors are turning a little more cautious on the stock market. That's coming at a time when stock prices are testing some important resistance levels.
Chart 2
NASDAQ UP AGAINST FORMIDABLE RESISTANCE... In my opinion, the key stock average to be watching right now is the Nasdaq Composite Index. That's because of its importance as a leading indicator for the rest of the stock market. The weekly chart shows a major resistance barrier in the Nasdaq at 2098, which was the high reached at the start of 2002. That has been a major upside target for the Nasdaq market -- and also represents a level where some profit-taking can be expected. A lot of traders are chart watchers. They know that a good time to take some money off the table is when an overbought market reaches a major price peak. Apparently, some traders jumped the gun this week and started selling at 2000, which is more of a psychological barrier. Traders also like to take profits an important round numbers. Although there's no particular chart significance to 2000, it's only .05% away from a major resistance level. Why wait? The weekly indicators are also weakening. The 14-week RSI line has been slipping back below 70 which shows some loss of upward momentum. More importantly, the weekly MACD lines turned negative this week for the first time in a year. That's another sign that the Nasdaq rally may be running out of steam. The first support level to watch is the 10-week moving average and this week's price low. Any closing violation of those levels would be more cause for concern. The fact that this week's downside reversal occurred on the heaviest volume in four weeks is a negative sign.
Chart 3
SOME ROTATION GOING ON... The two weakest sectors this past week were retailers and technology. Some of the week's biggest technology losers were in the chip sector and included the likes of Advanced Micro Devices, Applied Materials, and National Semiconductor. The chip stock that attracted the most attention on Friday was Intel. The big chip bellwether tumbled in heavy trading. As the daily chart shows, Intel is now threatening chart support along its late November low and its 50-day moving average. Any close beneath those two levels next week would undoubtedly have a negative impact on the rest of the market. Yesterday, we showed a number of retailers that broke down this week on volume. Chart 5 shows Sears cracking its 50-day average at week's end on very heavy volume. When money starts moving out of former leaders (like retailers and technology) it has to rotate somewhere. Some of that money appears to be rotating into the enery sector. Chart 6 shows the top oil service percentage gainer for the week. RIG exploded through its September high and its 200-day moving average. And it did so on strong volume. When the market starts to sag, money moves around. On Friday, stock money rotated into bonds, gold stocks, and oil service stocks. That's usually a sign that stock market traders are turning more defensive.
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Chart 6
