DOW RALLY STALLS AT LONG-TERM RESISTANCE -- SOX PULLING NASDAQ LOWER -- OIL SERVICE STOCKS MAKE ENERGY TOP SECTOR -- CHINESE CURRENCY REVALUATION COULD BOOST LONG-TERM U.S. RATES
DOW STALLS AT LONG-TERM RESISTANCE... On Wednesday, the Dow Industrials moved above the highs reached in the spring of 2002 at 10673. I stated at the time that the Dow needed to stay over that resistance barrier through week's end. It wasn't able to do that. Friday's selloff pushed the Dow back beneath the 2002 high. That's not necessarily bearish. But it does negate that upside breakout for the time being. Meanwhile, the daily chart shows the Dow falling well below the late January high that was exceeded at midweek. That upside move is also in doubt. Especially considering that the 14-day RSI line is showing some "negative divergence" near 70. And the daily MACD lines have stayed negative. The late week action suggests to me that instead of resuming its uptrend, the Dow and the other blue chip averages are still stuck in a February trading range.
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NASDAQ STILL UNDERPERFORMING... The Nasdaq continues to lag behind the blue chips. This week's Nasdaq rebound retraced about half of its recent selloff before weakening again on Friday. That puts its 50-day average in jeopardy again. Although the daily RSI line is neutral, the MACD lines are still negative. The Nasdaq/S&P 500 ratio is still falling. That's just another sign of loss of leadership by the Nasdaq market. That in itself is anothe reason to be more cautious. Our work suggests that market gains are harder to come by when the tech-dominated Nasdaq is lagging. Not surprisingly, technology was the week's weakest sector. One of the reasons is the continuing weakness in the Semiconductor (SOX) Index. Chart 4 shows the SOX closing back under its 50-day line on Friday. The SOX/Nasdaq ratio line has been dropping for more than a month and dropped more this week. After leading the Nasdaq higher most of last year, the SOX is pulling the Nasdaq lower early in 2004.
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OIL SERVICE KEEPS ENERGY IN THE LEAD... Thanks to firmer oil prices, the energy sector was the week's top performer. Most of the credit goes to the oil service stocks. Chart 5 shows the Oil Service Index rising to a new 52-week high this week. The OSX/S&P 500 ratio turned up two months ago and is still rising. I've suggested recently that energy stock leadership -- coupled with rising oil prices -- is a potential negative for the stock market and the economy. It was reported this morning that the December trade deficit jumped to the second highest level ever. The main reason was that rising oil prices were boosting the price of U.S. imports. Economists keep telling us that rising commodity prices as a result of a falling dollar aren't a problem. They may be having second thoughts after that report.
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CHINESE REVALUATION COULD BOOST LONG-TERM RATES... The front page of the Wall Street Journal today carried a story headlined: "China Rethinks The Peg Tying Yuan to the Dollar". The story claims that the Chinese may be getting ready to revalue the yuan or widening its trading band with the dollar. A New York Times story earlier in the week suggested a 5% revaluation could take place as early as March with another 5% by year's end. The WSJ suggests that a Chinese revaluation might encourage other Asian countries with dollar pegs to revalue their currencies as well. One side effect of that move would be a weaker dollar. Another might be higher U.S. interest rates. Asian central bankers have been buying a lot of dollars to keep their currencies down and reinvesting those dollars in Treasuries. At the government's bond auction on Thursday, foreign central bankers bought almost half of the amount. They bought 46% of three-year notes, 43% of five-year notes, and 45% of ten-year notes. Mr. Greenspan testified before Congress on Wednesday that foreign purchases were too small to impact the direction of interest rates. Excuse me, but 45% isn't a small number. Mr. Greenspan also testified that foreign purchases were limited to short-term debt and wouldn't impact long-term rates. Thursday's numbers, however, show that the Asians bought almost half of the long-term debt offered. Despite what Mr. Greenspan says, Asian central banks are big players in our debt markets. If they stop buying, it's hard to see how interest rates can do anything else but rise.
