BIG DROP IN OIL HELPS FRIDAY CLOSE -- FINANCIALS AND TECHNOLOGY HAVE STRONG WEEK --- NASDAQ EXCEEDS 50-DAY AVERAGE
NASDAQ EXCEEDS 50-DAY AVERAGE... In a continuation of Thursday's strong action, the Nasdaq led the rest of the market into a strong Friday close. As Chart 1 shows, the Nasdaq finally broke through its (blue) 50-day average at week's end for the first time since early July. Upside volume for the last two days of the week saw a noticeable jump. The Nasdaq/S&P ratio line along the bottom of the chart is also encouraging. It shows the Nasdaq starting to outperform for the first time in more than two months. Peoplesoft and Oracle accounted for a big jump in software stocks and also contibuted to the heavy Nasdaq trading. Also supporting the strong Nasdaq week was a rebound in chips and Internet stocks. Chart 2 shows the IIX Internet Index closing well over its 50-day line. The SOX Index closed above its 20-day line for the first time in 2 1/2 months.
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JDSU AND TXN ARE TECHNOLOGY LEADERS ... Two of the top percentage gainers in the technology sector are shown below. JDS Uniphase broke through its 50-day moving average on rising volume. Texas Instruments did the same on much more impressive volume. That helped revive the SOX Index which ended the week on a strong note.
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FINANCIAL LEADERS... Besides technology, financial stocks were market leaders this week. Two of the top performers were Capital One and Lehman Brothers Holdings. Capital One broke through its June high to reach the highest level in five months. And it did so on rising volume. Lehman Brothers closed back over its 200-day moving average for the first time in three months. Good upside volume for the week was symptomatic of heavy buying of brokerage stocks.
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SECTOR ROTATIONS ARE POSITIVE... Two groups that we like to see leading the market higher are financials and technology. Historically, the market does better when both groups are showing relative strength. Financial stocks have been leading for weeks. Technology is just now starting to show some signs of a bounce. Those two factors should combine to prolong the current market rally. A third ingredient in the week's sector rotation was a $2 drop in crude oil on Friday. As a result, energy stocks fell. Although energy stocks have been holding up much better than the commodity, any oil weakness is encouraging for the rest of the market. That's especially true of the Dow Transports which hit a new 52-week high today (Chart 8). Chart 9 shows the Dow Utilities closing just shy of another new high. That increases the odds for the Dow Industrials to move higher as well. Chart 10 shows the Dow ending the week above its 200-day moving average. That's also a good sign.
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WEEKLY INDICATORS IMPROVE... Although short-term indicators have been positive, we've been waiting for the slower -- but more important -- weekly indicators to turn positive as well. That's because weekly signals give more reliable signals of meaningful market moves. Two out of the three weekly indicators shown below are already positive. The top chart shows the weekly stochastic lines moving over 50 which is good. The lines just below the price chart show the Commodity Channel Index (CCI) moving up to a four-week high which is also good. The last one we're waiting for are the weekly MACD lines which are very close to turning positive but haven't done so yet. Although they're usually among the last to cross, they're also among the most reliable. One more up week should do the trick. Although most of our technical indicators are now positive, one of our concerns has been weakness in the technology sector. This week's upturn, however, may be a sign that the techs are finally helping instead of hurting the market. Today's negative PPI report, along with a strong financial sector, also suggests that interest rates may not be an immediate threat. Although the market still has to weather a seasonally weak period from mid-September to mid-October, the chances for higher prices through the balance of the year have greatly improved.
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