NEW FOCUS ON RISING RATES BOOSTS DOLLAR AND HURTS GOLD AND STOCKS -- BIOTECH BREAKDOWN -- TELECOMS BOUNCE -- COSTO BREAKS OUT --
GREENSPAN EFFECT... In a Wednesday speech in London, Mr. Greenspan talked about the possibility of the Fed having to raise rates more aggressively than planned if inflation pressures continue to build. Thursday's trading seems to be a delayed reaction to those remarks. Bond yields started rising again which gave a strong boost to the U.S. Dollar. That pushed gold prices down $6.50 and gold shares down 3.8%. Chart 1 shows the 10-year T-note yield climbing above 4.80% today and moving up toward its recent high at 4.90%. That boosted the dollar and pushed the Euro sharply lower. Chart 2 shows the Euro tumbling beneath 1.21 today. Charts 3 and 4 show gold and the XAU Index falling along with the Euro after meeting resistance at their moving average lines. All this is consistent with expectations for higher interest rates. That probably accounted for much of today's stock selling. Technology stocks were the hardest hit along with biotechs. The defensive consumer staples held up relatively well. The only group to rally was telecommunciations.
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TELECOM BOUNCE... Three of the top S&P 500 gainers today were in the telecom group and are shown below. SBC, Verizon, and Bellsouth jumped on strong volume. SBC and Verizon are bouncing off their 200-day averages. SBC is the first to clear both moving moving average lines. Not surprisingly the top Exchange Traded Funds today were in the telecom group. Chart 8 shows the AMEX Telecom Holders turning up today. [Exchange Traded Funds or ETFs are baskets of stocks that trade like individual stocks. ETFs are a good way to buy an entire industry group or sector with one trade].
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BIOTECH BREAKDOWN ... Biotechs had a bad chart day. The daily chart shows the Biotechnology Index falling under its 200-day moving average to the lowest level in five months. Its relative strength is tumbling as well. This took a toll on the Nasdaq and the healthcare sector. The biggest Nasdaq percentage loser was Millennium Pharmaceuticals (Chart 10). Another big biotech loser was Genentech (Chart 11). DNA broke its 50-day average on Tuesday and has been falling on heavy volume.
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BUYING STAPLES... The Consumer Staples Select Sector SPDR has broken out to a new 52-week high. This week's relative strength may be a sign that the market is becoming more concerned about higher rates. Because of their defensive qualities, consumer staples usually do okay in a rising rate environment. Today's standout performer was Costco. Chart 13 shows COST breaking out to a new 52-week high on rising volume. Other 52-week highs are Procter & Gamble, Supervalue, and Wrigley.
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S&P 500 PULLS BACK FROM RESISTANCE... Today's market pullback shouldn't come as too much of a surprise. The next chart shows why. The S&P 500 SPDR has reached potential chart resistance near the 115 level where some profit-taking is to be expected. The fact that today's dip came on higher volume is a short-term negative. Its daily stochastics lines are also in overbought territory over 80. Today's jump in interest didn't help matters either. In a nutshell, the market rally appears due for a correction to repair its short-term overbought condition. A setback toward its 50-day average wouldn't be surprising and might even be healthy. There's also chart support near 112. In my view, any serious setback in the market from current levels should be used as an opportunity to do some stock accumulation. I believe there's a strong chance that this year's highs will be tested -- and maybe even exceeded -- before the year is out.
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