WEAK DRUG GROUP PULLS DOW LOWER -- OTHER AVERAGES GAIN ON THE WEEK -- LEADERS ARE SMALL CAPS, MATERIALS, TECHNOLOGY, AND TRANSPORTATION
DOW ENDS WEEK LOWER... Friday's Dow selloff put it in negative territory for the week. That loss was softened by the fact that the Nasdaq and the S&P 500 had weekly gains. Most of the Dow selling came from the drug group. Three of the Dow's biggest Friday losers were Pfizer, Merck, and Johnson & Johnson. Pfizer was the biggest drag on the Dow. Chart 2 shows the drug stock falling under its 200-day average on rising volume. Chart 3 shows the Pharmaceutical (DRG) Index also breaking its 200-day line. That helped make healthcare the week's weakest sector. Chart 4 shows the Health Care Select Sector SPDR trading well under its 50-day day average. Its relative strength line fell to a ten-week low. Another defensive sector that fell this week was consumer staples.
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CONSUMER STAPLES BREAK 50-DAY LINE... The Consumer Staples Select Sector SPDR fell under its 50-day average on Friday. Its relative strength line has been dropping since May. Two stocks contributing to Friday's fall were Supervalue and Coca Cola. Both broke their 50-day lines on rising volume. The biggest weekly damage, however, came from Wal Mart which tumbled all week in heavy trading.
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SMALL AND MID CAP LEADERSHIP... A good sign for the market was this week's upside leadership by small and midcap stocks. The S&P 600 Small Cap Index rose to a three-month high and is nearing a challenge of its April high. The S&P 400 Mid Cap closed at a two-month high. Both relative strength lines are rising. It's usually a good sign when smaller stocks are leading bigger stocks higher. Another good sign came from this week's Nasdaq leadership.
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NASDAQ TAKES OVER LEADERSHIP ... While blue chips sagged on Friday, the Nasdaq rose to another two-month high. What's more impressive is the action in its relative strength line. The Nasdaq/S&P 500 ratio broke out to a new two-month high. That puts the Nasdaq in a leadership position. Our work suggests that the market usually does better when the Nasdaq is leading it higher. Three of Friday's Nasdaq leaders are shown below the Nasdaq chart. The most impressive combination of price and volume action belongs to Cintas.
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SOUTHWEST TAKES OFF... The Dow Transportation Average hit another multi-year high today. Up to now, most of the leaders have been in the rails and truckers. Today the big transport leader was Southwest Airlines. Chart 16 shows LUV surging over its 200-day average on massive volume. That puts the airline leader at the highest level in six months.
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MARKET UPTREND IS STILL INTACT ... The market rally that started in mid-May is still intact. The Nasdaq 100 Shares (QQQ) are moving up to challenge their early April high. I think that level will eventually be exceeded. The S&P 500 SPDRs are still trading well above the down trendline drawn over the March/April highs. To reverse the current uptrend, the SPY would have to fall under its June low and/or its 50-day moving average. I also see positives in this week's sector rotations. While defensive consumer staples and drugs fell, offensive groups like small caps, basic materials, technology, and transportation did well. That suggests to me that the market is growing more confident. In my opinion, the best way to participate is to stick with market groups showing the best relative strength.
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