MARKET AVERAGES FALL ON HEAVY VOLUME -- SOX BOUNCE NOT ENOUGH TO OFFSET MATERIAL FALL -- NO ROTATION SEEN INTO STAPLES OR HEALTHCARE

SOX BOUNCES A BIT... With some help from Intel, Semiconductor Holders managed a modest gain today and on rising volume. That was enough to keep it above its 50-day moving average. But it closed near the bottom of its daily range. Even so, chips were one of the few bright spots in an otherwise bad market day. That's because large losses in basic material stocks more than offset much smaller gains in the chips. Blue chips were weak all day. By day's end, even the Nasdaq market succumbed to selling.

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BASIC MATERIALS GET HAMMERED ... With base metals prices dropping sharply today, industrial metal stocks got hammered. Alcoa and Phelps Dodge were two of the hardest hit. Chart 2 shows the Materials Select Sector SPDR falling on the heaviest trading in three weeks. Its relative strength line fell as well. That hurt the market because material stocks have been one of the market's strongest groups. Besides the chips, there was some nibbling in airlines and consumer staples. But not enough to overcome the commodity-related selling.

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NO ROTATION HERE ... One of our readers asked about where money usually rotates to when it starts to come out of basic materials and energy. The answer is consumer staples (including healthcare), utilities, and financials -- in that order. Although financials and utilities have been doing relatively well of late, consumer staples and healthcare haven't. Chart 3 shows the Consumer Staples Select Sector SPDER trading near its low for the year. Although it was one of today's lesser sector losers, it didn't attract much buying either. The Health Care Select Sector SPDR (Chart 4) doesn't look any better. It too is trading near its 2004 low. Drug stocks have been especially weak. Biotech stocks have also weakened over the past few days. Along with technology, these two sectors have been the year's weakest. If money tends to rotate from the strongest (like materials) to the weakest, there's no sign of money rotating into either of these two groups.

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MARKET AVERAGES FALL ON RISING VOLUME... The market also got a double dose of selling from energy today. While energy stocks fell (which added to the selling), crude oil jumped over a dollar (which also contributed to the selling). All in all, it was a bad market day as reflected in the three major stock indexes. The Dow Diamonds met resistance at their 50-day average before tumbling to a two-week low on the heaviest volume in two weeks (Chart 5). [Two of its biggest losers were Alcoa and Exxon Mobil]. The S&P SPDRs fell below their 200-day average on rising volume (Chart 6). [Two of its weakest stocks were Phelps Dodge and Freeport McMoran Copper & Gold]. The Nasdaq 100 Shares (QQQ) failed an early attempt to close over their 200-day moving average. The fact that the downside reversal day took place on rising volume is a bad sign of more selling to come. The QQQ rising relative strength line since mid-August shows that some money has been moving into technology which has been one of the year's weakest sectors. But not enough to offset larger losses in the blue chips. Which is the theme of today's messages. There isn't enough going up at this point to offset the things that are going down. That doesn't bode well for the market until recent leaders like basic materials and energy stabilize, or something else moves into a new leadership role.

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BUYING BONDS AND SELLING DOLLARS... Some of the money coming out of stocks is finding its way into the bond market. Chart 8 shows the 7-10 year T-bond Fund iShares trading higher today after bouncing off its moving average lines. Its relative strength line (versus the S&P 500) had been dropping since mid-August as traders favored stocks. Over the last week, however, some traders have been switching to bonds. When bond prices rise, yields fall. That explains the selling of the US dollar. Chart 9 shows today's late downturn in the dollar after earlier gains. That helped the gold market shrug off earlier losses today to end in the plus column. Gold may have also gotten a boost from oil's late bounce. For a lot of reasons, all eyes will be on tomorrow's oil inventory data.

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OIL CLOSES HIGHER... Crude oil rebounded today after reversing earlier losses. Its daily bars have yet to break the tight up trendline drawn under its September/October lows. However, its 14-day RSI line remains in overbought territory over 70. Its daily MACD lines are starting to converge (weaken), but are still positive. We'll all be watching to see how oil reacts to its weekly inventory data which will be released tomorrow.

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