LOSS OF LEADERSHIP FROM THE SOX INDEX MAY BE A BAD OMEN FOR NASDAQ MARKET

SOX ALREADY ON SHORT-TERM SELL SIGNAL... Our midday update talked about the Semiconductor (SOX) index being on a short-term sell signal. We also showed that the weekly chart was starting to look toppy. Chart 1 shows the daily stochastics and MACD lines for the SOX having turned negative. The SOX is bearing down on its 50-day moving average. A close below that line would be another negative sign. Chart 2 shows the Nasdaq dropping on increasing volume today. Its stochastic and MACD lines may also be rolling over to the downside. What concerns me is that a downturn in the SOX could cause problems for the Nasdaq market. Today's drop in the SOX of -4.15% was much greater than the Nasdaq's drop of -1.75%. That also means that the SOX is now showing relative weakness. That's not a good sign for either index.

Chart 1

Chart 2

SOX/NASDAQ RATIO TURNS DOWN... Chart 3 plots a relative strength ratio of the SOX Index divided by the Nasdaq Composite Index. Earlier this month the ratio failed to reach its November high. Today the ratio broke its December low. The short-term trend of the ratio line is now down. Chart 4 plots a longer range version of the SOX/Nasdaq ratio from the middle of 2002. The ratio turned up during October 2002 when the Nasdaq bottoming process started. After a setback, it turned up again in February -- a month before the Nasdaq's March bottom. The ratio has been rising ever since. That means that relative strength in the SOX has been a bullish factor for the Nasdaq. What concerns me is the noticeable breakdown in the yellow box to the upper right. Not only has six-month support line been broken, but this represents the first significant downturn in the ratio since last February. The rising SOX/ratio over the past year has been supportive to the Nasdaq. This week's downturn in the ratio may not be.

Chart 3

Chart 4