RISING OIL AND FALLING SOX UNDERMINE STOCKS -- THE DOW, S&P 500, AND RUSSELL 2000 BREAK 200-DAY MOVING AVERAGES -- SOME MONEY IS FLOWING BACK INTO BONDS AND CASH

ENERGY SOARS -- CHIPS FALL... Which market groups are rallying and which ones are falling usually carry a market message. Two notable group dynamics that took place this week were a new high in energy shares and a now low in semiconductors. Neither one is good for the stock market. Both happening at the same time is a double whammy. Energy was the top performing market sector for the week. Chart 1 shows the Energy Select Sector SPDR rising to a new 52-week high. That came on the back of crude oil prices rising back over $41. That's not good for the economy or the market. Neither is technology weakness. The other big story of the week was the plunge in the semiconductor group to a new 2004 low (Chart 2). That collapse made the Nasdaq the worst performer of the major markets. Underperformance by the Nasdaq isn't good for the rest of the market.

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NASDAQ NEARS 2004 LOW... The Nasdaq was the first of the major indexes to break its 200-day moving average (two weeks ago) and is nearing a test of its 2004 low. The pickup in volume as prices fell isn't a good sign. The Nasdaq/S&P 500 ratio line has already fallen to a new low. Our work suggests that relative weakness by the Nasdaq usually pulls the rest of the market down with it. By week's end, the Dow Industrials and the S&P 500 broke their 200-day lines as well. The fact that the downside violation of those long-term support lines took place on Friday carries more significance than a mid-week breakdown. Next week could be a difficult one.

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RETAILERS AND HEALHCARE DROP -- UTILITIES GAIN ... Besides technology, two of the weakest sectors were healthcare and consumer discretionary stocks. After a midweek bounce, renewed selling in biotechs and drugs pushed the Health Care Select SPDr well below its 200-day moving average by week's end (Chart 6). The Consumer Discretionary Select SPDR suffered a similar fate (Chart 7). Retailers were the main drag on the latter group. One of the few bright spots was utilities. Chart 8 shows the Utilities Select Sector SPDR closing at a new four-month high. Utilities may have drawn some strength from the late week surge in Treasury bond prices owing to a couple of tame inflation reports. Some other rate-sensitive groups -- like homebuilders -- also ended the week on a positive note as the the yield on the 10-year T-note fell to a three-month low. That weakened the dollar and gave gold and other commodities a late-week boost. Basic Material stocks also gained on the week with the biggest gains in gold, paper, and steel.

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OIL SERVICE INDEX BREAKS OUT TO THREE-YEAR HIGH ... Within the oil patch, the standout performer during the week was the Oil Service Index. Its daily chart shows the OSX breaking through its spring highs to reach a new high for the year. Its longer-range picture is even more impressive. The monthly bars in chart 10 show the OSX just now breaking out of a three-year trading range. Its relative strength is about to do the same. That carries good news for oil service stocks. Unfortunately, it probably carries bad news for the rest of the stock market because it implies higher energy prices. One obvious casualty of rising oil prices is the airlines. The S&P 500 Airline Index hit a new 52-week low on Friday.

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CASH IS LOOKING GOOD... The technical condition of the market continues to weaken. Prices are dropping on heavier volume. A real key for the market next week will be the Nasdaq's test of its 2004 low. Judging from the breakdown in the semiconductor group, the odds of that low holding don't look too promising. The Dow and the S&P 500 will probably see more selling next week as well after breaking their 200-day lines on Friday. Small caps are weakening as well. The Russell 2000 Small Cap Index also broke its 200-day line on Friday. Bonds ended the week on a strong note. A couple of benign inflation reports pushed the 7-10 Year Treasury Bond Fund ETF to the highest level in three months. Its relative strength line shows bonds outperforming stocks for the first time since March. Some money is rotating out of stocks and back into bonds. Some of that money is also moving into cash which is the safest place to be.

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