METALS LEAD MATERIAL SECTOR HIGHER -- MARKET ENJOYS OVERSOLD BOUNCE AS OIL TOUCHES $50

MATERIALS SPDR IS STRONGEST SECTOR... Yesterday's article talked about using the Materials Select Sector SPDR as one way to participate in the industrial and precious metals rally. In today's trading, while everyone was looking at oil, metals markets turned in an even stronger performance. The XLB gained more than 2% and was the day's leading sector. Chart 1 shows the Materials ETF moving even closer to its high for the year. Its relative strength line jumped impressively as well. The group's top five leaders came from the metals sector -- aluminum, copper, gold, and steel. Phelps Dodge (copper) was one of the day's biggest gainers and closed at a new record high. Freeport McMoran Copper & Gold was a big winner. Alcoa (aluminum) was the Dow's biggest gainer. Other metal leaders were Newmont Mining (gold) and US Steel. Gold stocks were the day's strongest industry group (+3%) and hit a new recovery high.

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COPPER LEADERS ... We showed these two stocks yesterday. Phelps Dodge broke through 90 today to exceed its 1997 peak and hit a new record in the process. Freeport McMoran Copper & Gold is moving in that direction. You'll notice that both stocks hit major peaks during 1997 (red arrows) as the Asian currency crisis started and deflationary trends pushed commodity prices into major downtrends. Both copper stocks started their bull markets during 2002 (green arrows) as the CRB Index completed the second half of its major "double bottom". There's little doubt that the bull market in the CRB is having a bullish influence on commodity stocks.

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ALCOA AND US STEEL BREAK MOVING AVERAGES, NEWMONT JUMPS ON VOLUME ... Alcoa broke its 50-day moving today in convincing fashion and was one of the day's top percentage gainers. The aluminum producer has been in sideways trading pattern since May. It may be getting ready for a run at the top of that four-month trading range. US Steel also broke through its 50-day line just days after bouncing off major support at its 200-day moving average. It may be getting ready for another try at its 52-week high near 40. Newmont Mining rounds out the top five metal gainers. Chart 7 shows the big gold stock climbing back over 44 after bouncing off its moving average lines. Its upside volume was pretty impressive as well. The jump in NEM help push the Gold/Silver (XAU) index to the highest level in five months.

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MAJOR AVERAGES REBOUND ... The major market averages experienced an oversold bounce today. The biggest percentage gain came from the Dow -- and on rising volume (Chart 8). The Dow is also in a short-term oversold condition and ended back over psychological support at the 10K level. The S&P 500 (Chart 9) and the Nasdaq Composite (Chart 10) found support at their 50-day moving averages. The Nasdaq also had some decent upside volume. The fact that the market rallied with oil reaching $50 -- and semiconductors on the defensive -- was a gutsy performance. It's not a lot to build on, but it could be a start. As I suggested last week, oil has a history of weakening during October. If it does so again, that could give the market a fourth quarter boost.

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