FED HINTS AT MORE INFLATION -- DOW BACKS OFF FROM 10K -- SOX AND NASDAQ BREAK 50-DAY AVERAGES
DEFLATION THREAT HAS PASSED... The Fed left rates unchanged today and left the main part of their statement intact. One change it did make, however, related to the standoff between the forces of deflation and inflation. Up to now, the Fed has maintained that deflation was a bigger threat than inflation. Its battle against deflation has been one of the driving forces behind its preference for a falling dollar and rising commodity prices. Today's statement said that "the probability of an unwelcome fall in inflation has diminished". It went on to say that the threats of deflation or inflation were now equally balanced. That's a subtle recognition that rising commodity prices have signalled an end to the deflation threat. It's also a subtle hint that the odds are greater for higher interest rates during 2004. That's why bond prices dropped sharply after the announcement. Today's sector rotations also hinted at higher commodity prices and higher rates next year. Basic material and cyclical stocks were gainers today, while rate-sensitive financials and homebuilders corrected downward. The Dow backed off from psychological resistance at 10K. The hourly Dow chart shows two unsuccessful attempts to break through that barrier. It also shows initial chart support near 9850. The Dow has been acting better than the Nasdaq recently -- largely owing to its cyclical components. Three of today's Dow gainers were General Motors, International Paper, and Exxon Mobil. Sympomatic of slippage in the technology sector, the Dow's weakest stock was Intel. That chip bellwether has led a decline in the entire semiconductor sector. That's pulling down the Nasdaq market, which backed off from the 2,000 level last week.
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INTEL BREAKS SUPPORT -- PULLS SOX DOWN... Last Friday, I talked about the Nasdaq starting to weaken in the 2,000-2100 resistance zone. I also talked about a possible "double top" forming in Intel, which is the bellwether for the chip sector. Today's chart breakdown violated chart support at its late November low and its 50-day average. And it did so on rising volume. Applied Materials looks even weaker. As a result, the Semiconductor (SOX) Index broke down as well. Needless to say, that played a big role in Nasdaq selling today. The ratio under the SOX chart shows it slipping relative to the Nasdaq Composite Index. That's not good for either one.
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NASDAQ BREAKS 50-DAY LINE... When the big techs start to slip, that's reflected in the Nasdaq 100 first. That index of the Nasdaq's biggest stocks has been showing relative weakness for weeks. It was today's worst performer. The Nasdaq 100 Shares (QQQ) broke their 50-day moving average today. Short-term indicators are negative. So did the Nasdaq Composite. And they both did it on higher volume. Relative weakness by the big techs is usually a depressant on the rest of the market. The next key support level to watch on both indexes is their late November lows. As long as those lows hold, the short-term trend will remain sideways. If they're broken, short-term trends will turn down.
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BUYING CHEMICALS... Basic materials gained again today -- with new highs hit by Phelps Dodge, U.S Steel, and MeadWestvaco. Chemical stocks were especially strong. Eastern Chemical has broken out to a new 52- week high. Dow Chemical is doing even better. That chemical leader has broken out to a three-year high. Energy stocks also gained more ground today. I had suggested last week that leadership by energy stocks is usually associated with some corrective action in the rest of the stock market. That appears to be what we're getting.
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