NEW HIGH BY TRANSPORTS AND UTILITIES BODES WELL FOR INDUSTRIALS -- WEEKLY S&P CHART LOOKS BULLISH -- FOLLOW THE LEADERS
DOW TRANSPORTS AND UTILITIES HIT 52-WEEK HIGHS... Two of the three Dow Averages reached a new 52-week high this week. Chart 1 shows the Dow Transports closing decisively over its summer high. Chart 2 shows the Dow Utilities in an even stronger climb. Interestingly, the utilities seem to have attracted most of the volume this week. This week's uspide progress was enough to push the Dow Composite Index to a new high as well (Chart 3). The Composite Index includes all 65 of the Dow industrials, transports, and utilities. Friday's upside breakout came on heavy volume (although the volume figures may have been distorted by the quarterly expiration of futures and options). That leaves the Dow Industrials as the only one not to exceed its summer high. The strong action in the other Dow Averages, however, should start pulling the Industrials higher as well. Although the Dow lost some ground this week, most other blue chip averages gained ground -- including the S&P 500.
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S&P WEEKLY INDICATOR TURNS UP ... The next chart puts the entire 2004 trend into better perspective and, in my opinion, carries a bullish message. First the trendlines. The entire year's price decline is contained between two parallel "channel lines" with a downward slope. That type of pattern more often results in a continuation of the prior trend (which was up) than a reversal of that trend. The S&P is nearing a test of the upper line. A decisive close over that resistance line would signal the start of another upleg which should test (and possibly even exceed) the high reached earlier this year. Another bullish development is seen on the weekly MACD lines. The MACD is a combination of exponentially smoothed moving averages that give reasonably reliable trend signals. One virtue of the weekly lines is that they give very few signals, which makes them noteworthy. The last signal given prior to this one was a "sell" in early March when the faster line crossed below the slower (see red arrow). This past week the faster line crossed over the slower for the first time in seven months. That constitutes an "intermediate-term" buy signal and greatly increases the odds for an eventual upside breakout in the S&P.
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VALUE STILL BEATING GROWTH... The next two charts show where most of the S&P 500 strength is coming from. The S&P Largecap 500 Value Index has alreadly broken out to a seven-month high and shows good relative strength. The Growth Index hasn't. The moral is pretty clear. The market appears to be heading higher. But it's being led by value stocks, not growth. This is also true among small and midcap stocks.
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FOLLOW THE LEADERS... In my opinion, the best way to play the emerging uptrend is to focus on groups that are leading the advance. That includes biotechs, consumer disretionary stocks, financials, industrials, the Internet, and the transports. Energy stocks are also hitting new highs, but may carry higher risks if the price of oil follows its normal tendency to weaken during October. Small caps are doing better than large caps. Within the large cap world, value is doing better than growth. [See John's Latest Performance Chart for a graphic look at the market leaders]. Two groups that we've not favored have been semiconductors and technology in general. That's why I'm watching the last three charts very closely. The Nasdaq 100 is the last of the major stock indexes to stay below its 200-day moving average. A close over that long-term resistance line would give the technology sector -- and the entire market -- a big boost. The Internet group has already accomplished that task. The biggest tech laggard has been the Semiconductor (SOX) Index. Chart 9 shows the SOX rebounding to challenge its 50-day moving average. The good news is that its daily MACD lines have already turned up. An upside move by the SOX could boost the Nasdaq enough to put technology on our buy list.
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