DROP IN OIL GIVES MARKET A BOOST -- AIRLINES LEAD TRANSPORTS HIGHER

CRUDE OIL DROPS $1.50 TO TWO-MONTH LOW... News that the Iraq transition took place two days early and a sharp drop in crude oil prices is giving the market a boost on Monday. Chart 1 shows crude oil dropping to the lowest level since late April. Not surprisingly, energy stocks experienced profit-taking (Chart 2) while the airlines kept transportation stocks in a leadership role. Other leading Monday sectors were consumer staples, materials, industrials, and utilities. All the major stock averages gained ground. Energy, healthcare, and technology were laggards.

Chart 1

Chart 2

TRANSPORTS HIT FOUR-YEAR HIGH ... Transportation stocks are on a tear. The monthly bars in Chart 3 show the Dow Transportation Average climbing to the highest level in more than four years. Most of today's biggest gains came from the oil-sensitive airline stocks.

Chart 3

AIRLINES TURNING UP... Up until this month, airlines were the weakest part of the transports (the strongest being air freight, rails, and truckers). That may have had something to do with the fact that airlines are especially sensitive to the direction of oil prices. Rising oil prices kept a lid on airlines. With oil prices now dropping, airlines are getting a big lift. Chart 4 shows the Airline Index exceeding its May peak and reaching a two month high. The XAL is moving up to challenge its 200-day moving average and chart resistance near 60. Its relative strength line turned up in mid-May just as oil prices were peaking.

Chart 4