GOLD BREAKS OUT -- SELLOFF IN CRUDE OIL BOOSTS MARKET AT WEEK'S END

GOLD HITS FOUR-MONTH HIGH ... My Thursday Market Message focused on an impending bullish breakout in gold as it tested its July peak at $410. Bullion completed that bullish breakout today with a gain of $6.20 to put it at a new four-month high. The Gold & Silver Index (XAU), which broke out on Thursday, ended the week above its 200-day moving average. This is in keeping with the historical tendency for gold stocks to lead the commodity higher. Chart 3 shows the Materials Select Sector SPDR, which is tied to commodity prices, ending at the highest close in seven weeks. A weaker U.S. dollar is giving a boost to gold and other commodities.

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BANKS GAIN MORE INTEREST -- FINANCIALS CLOSE STRONG ... Earlier today I showed the Bank Regional Holders leading the bank group higher (Chart 4). By day's end, the big banks achieved an upturn of their own. Chart 5 shows the Bank Index (BKX) closed north of its 200-day average. At midday, I also showed the Financials Select Sector SPDR challenging its 200-day line. Chart 6 shows the financial ETF clearing that resistance barrier. Lower bond yields are giving a boost to rate-sensitive stocks. Utilities and REITs also had a strong week.

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DIVIDEND INDEX FUND BREAKS OUT... Another group that I showed earlier today was the iShares Dow Jones Select Dividend Index Fund which has been attracting new funds. Chart 7 shows that ETF ending the week at a new five-month closing high. Investors have also been favoring large cap value over growth stocks. The large cap value index closed over both moving average lines on Friday in a show of relative strength. By contrast, the large cap growth index is still trading under its May low. Investors are opting for value and dividends.

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DROP IN OIL BOOSTS STOCKS ... A sharp selloff in oil late in the day gave a boost to the stock market as the week ended. Price-wise, the market had a pretty good week. Volume-wise, it didn't. Although trading in the S&P 500 SPDR picked up a bit on Friday, trading for the week was disappointingly light. The first test above the market will most likely occur at the 50- and 200-day moving averages -- and the early August peak just above 111. A close above that level -- accompanied by heavier trading -- is needed to signal a more serious advance. Chart 11 shows the Nasdaq 100 (QQQ)also ending the week higher, but on lower volume. The good news is that it closed over its 20-day average and could reach its upper Bollinger Band and/or its 50-day moving average ranging which coincide roughly with its late July peak at 35.10 (see box).

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OVERBOUGHT OIL MARKET CLOSES LOWER... Oil prices fell heavily at week's end after coming dangerously close to $50 a barrel. The daily chart shows that the 14-day RSI line along the top of the chart moved into overbought territory over 70 this week for the first time in three months (see down arrows). That no doubt contributed to some late-week profit-taking. The daily MACD lines, which are slower to turn, are still in positive alighnment. The chart also shows that prices have been trending over the 20-day moving average since early July. That should be the first line of support if the oil market is entering a downside correction. Since oil and stocks have been negatively correlated, any continued weakness in oil should provide some relief to the stock market.

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PERFORMANCE RANKINGS ... If you haven't already done so, please read the more comprehensive Market Message posted earlier today which puts things in a longer term perspective and deals with intermarket trends and their effect on recent group rotations. Please also refer to John's Latest Performance Chart which plots the top monthly groups which include telecomm, gold, financials, utilities, REITS, dividend-paying stocks, and large cap value. Interestingly, oil stocks underperformed the S&P 500 over the last month and may have given an early warning of a top in oil. Chart 13 shows the Energy Select Sector SPDR falling to a two-month low. Its relative strength line has also turned down (see arrow). Stocks often lead their respective commodity. Just as gold stocks are leading bullion higher, oil stocks may be leading oil lower.

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