DROP IN CONSUMER CONFIDENCE HELPS BONDS, HURTS STOCKS -- SOX LEADS TECH LOWER -- RATE-SENSITIVE STOCKS ARE UP

BOND YIELDS FALL TO NEW LOW... The August drop in consumer confidence is boosting bond prices today and, at the same time, pushing yields to a new five-month low (see Chart 1). Hints at economic weakness are causing investors to sell some stocks and buy some bonds. Falling bond yields are weakening the dollar which is boosting gold and gold shares. Rate-sensitive stocks -- like utilities and REITS -- are also feeding off a stronger bond market. Within the market, a weak semiconductor group is causing the Nasdaq to pull the rest of the stock market lower. While chips are the day's weakest group, energy is the strongest -- a bad combination.

Chart 1

GOLD STOCKS ARE UP ... The Gold/Silver (XAU) Index has been consolidating below its 200-day moving average over the past week (Chart 2). With gold back over $411 today, gold stocks may attempt another upside breakout. Chart 3 shows Newmont Mining (the biggest XAU stock) finding support at its 200-day line. Chart 4 shows Freeport McMoran Copper & Gold also trading over that long-term resistance line. Although oil is down today, most commodity markets are trading higher.

Chart 2

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Chart 4

UTILITIES AND REITS HIT NEW YEARLY HIGH ... Two pillars of strength remain the rate-sensitive utilities and REITS. The Dow Jones Utility Average is trading close to a new 52-week high today (Chart 5). You'll notice that the upturn in utilies started in May -- just as bond yields were peaking. Real Estate Investment Trusts also bottomed in May. Chart 6 shows the Morgan Stanley REIT Index trading at a new 2004 high. Both defensive groups usually do better when bonds are outperforming stocks.

Chart 5

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MARKET AVERAGES WEAKEN ... Charts 7 and 8 offer some insight as to why the market has started to weaken. The daily stochastic lines for the S&P 500 and the Nasdaq 100 are turning down from overbought territory over 80 (see circles). The S&P 500 SPDR failed a test of its (red) 200-day average and is falling back below its 50-day line (Chart 7). The Nasdaq 100 (QQQ), which has been the weaker of the two, is meeting resistance near its 50-day line (Chart 8). The Nasdaq continues to underperform the rest of the market owing to relative weakness in technology.

Chart 7

Chart 8

SOX IS DOWN, OIL SERVICE IS UP ... Semiconductors are the day's weakest stock group. Chart 9 shows the Semiconductor (SOX) Index nearing a test of its recent low. Its relative strength line is already in new low ground. It's normally bad for the market when the chips are leading the technology sector lower. Meanwhile, oil service stocks are the day's strongest group. Chart 10 shows the Oil Service (OSX) Index climbing back over its 50-day average with a rising relative strength line. Energy leadership isn't good for stocks either because it hints at the possibility that oil may find new support in the low $40s.

Chart 9

Chart 10