CRUDE OIL HITS EIGHT MONTH HIGH -- ENERGY SECTOR EXTENDS GAINS -- INVESTORS SWITCHING FROM TECHNOLOGY TO INDUSTRIALS

ENERGY PRICES HAVE TURNED UP... Last week, natural gas prices rose to a six-month high. This week crude and heating oil followed suit. A surge on Friday pushed all three energy markets higher. Natural gas was the strongest and gained 9%. Crude oil jumped $1.19 to close over $33 for the first time in months. Heating oil also broke out to the upside. That puts all three energy markets in new uptrends. That bullish action is captured in the Goldman Sachs Commodity Index which is trading at the highest level since March. Last week I pointed out that energy stocks had become the strongest sector in the stock market. Friday's action continued that new trend. The energy sector was Friday's top sector.

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NATURAL GAS IS THE STRONGEST ENERGY GROUP... The energy sector can be broken down into three groups that are represented by three different indexes. The strongest group has been natural gas which is represented by the AMEX Natural Gas Index. That index is trading at a two-year high. The AMEX Oil Index, which includes large integrated oil companies, has risen to a 16-month high. The laggard in the group is represented by the PHLX Oil Service Index. All three are moving higher. If you want relative strength, natural gas stocks are preferable. If you want value, oil service stocks may be a better place to look.

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OIL SERVICE STOCKS RISE THE MOST ON FRIDAY... Chart 5 shows the PHLX Oil Service Index breaking through moving average resistance and moving up to challenge the highs formed during August and October. The OSX/S&P 500 ratio line has also turned up which a sign of new market leadership. Oil service stocks may provide the best value in the energy patch.

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BUYING AN EXCHANGE TRADED FUND... Last week I showed the Energy Select Sector SPDR hitting a six-month high. This week's performance was even more impressive. The XLE broke out to the highest level in a year and a half. Rising volume is a bullish sign. The rising relative strength ratio is another positive sign. There are lots of ways to participate in the energy sector rally. One was is to buy the commodities. One can buy options on the various energy indexes like the OSX; or individual oil stocks. One can also invest in an energy sector mutual fund. An increasingly popular way to participate in sector trading is through an Exchange Traded Fund (or ETF). ETFs are baskets of securities that trade just like individual stocks. Most are traded on the American Stock Exchange. Unlike a sector mutual fund, ETFs can be traded at anytime during the trading day. In addition, they can be traded as often as you like. The Energy Select Sector SPDR is an ETF. If you're looking for a way to participare in the energy sector rally, ETF trading is a simple and efficient way to do it. I'll be talking a lot more about ETF trading in the coming months.

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DOW HOLDS GAIN OVER 10K... A report showing a drop in consumer confidence on Friday sent the dollar tumbling to a new low. Commodities rallied as a result. The CRB Index gained over 3 points on Friday with all but three commodities rallying. Energy was the strongest commodity sector. Gold gained $4.70 to end at $410. Bonds prices rose on Friday. The two strongest market sectors this week were energy and basic materials. The two weakest were technology and consumer discretionary stocks. On Friday, the Dow added another 32 points and stayed over the 10,000 level. Three of the Dow's top gainers this week were United Technologies, Coca Cola, and General Motors. All three hit 52-week highs. UTX ended at an all-time high. Two of the weakest Dow stocks were Intel and Wal Mart.

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DOW GAINS GROUND ON NASDAQ... Chart 8 is a ratio of the Dow divided by the Nasdaq Composite. The ratio has turned up during the month of December. I've said in the past that loss of Nasdaq leadership makes it more difficult to make money in the market. At least that's what our historical research shows. However, money has a way of rotating throughout the stock market. Over the past month, it seems like investor preference is moving away from technology (which has led the market higher all year) into the type of industrial stocks that reside in the Dow.

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