ANOTHER JUMP IN OIL HURTS MARKET -- FINANCIALS FALL HARD -- CYCLICALS ARE WEAKENING -- NO SIGNS OF A BOTTOM YET

CYCLICAL FALL ALONG WITH CONSUMER STOCKS ... I mentioned yesterday that part of the market's problem is loss of leadership from former market leaders -- without any significant rotation into weaker groups. The first two charts show two market groups that usually compete with each other for market leadership. When traders are optimistic about the economy, cyclical stocks usually lead. When they turn more pessimistic, consumer stocks tend to do better. From January to May of this year, consumer stocks did better than cyclicals as the stock market started to weaken (see arrows). From May to October, cyclicals did much better. Right now, both are falling. Chart 1 shows the Morgan Stanley Cyclicals Index falling sharply this week to undercut initial chart support and its 200-day moving average. Its relative strength line is dropping as well. A lot of that came from big losses in base metal stocks. Unfortunately, money coming out of the cyclicals isn't finding its way into consumer stocks. Chart 2 shows the Morgan Stanley Consumer Index falling to a new 2004 low. It's usually a bad sign when both are falling.

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OSX UP, SOX DOWN ... On Tuesday, I wrote about how it was a good thing for the market to see some money starting to flow out of the oil service group (OSX) into the semiconductor (SOX) group. Unfortunately, today's action may have put on damper on that rotation and its optimistic implications. A big drop in distillate inventories pushed crude oil over a dollar higher to a new record. That made energy stocks the day's winners. Chart 3 shows the Oil Service Holders (OIH) climbing today. It's RSI line has bounced off initial support at 50. But the OIH still needs to close back over its 20-day average to strengthen its short-term trend. Semiconductors were one of the day's weakest groups (thanks to a 9% drop in Novellus). Chart 4 shows Semiconductor Holders (SMH) falling back under their 50-day average. I don't want to draw long-term implications from one day's action. But a rising OSX and a falling SOX isn't a good combination for the market. Chart 5 shows that the SOX/OSX ratio failed in its attempt to clear the 50-day average and is dropping again. If the market is going to have a yearend rally, that ratio line will have to start rising.

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GM FALLS WHILE MCD SIZZLES... General Motors as one of the biggest drags on the Dow today and plunged to a new 52-week low on rising volume. [AIG also plunged as insurance stocks tumbled]. Although consumer stocks haven't shown much bounce, McDonalds is one of the few exceptions. Chart 7 shows MCD breaking out to a six-month high on rising volume. People may not need a new car, but they still have to eat.

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FINANCIALS ARE FALLING... Financials are another former leading group that's rolling over. The Financial Select Sector SPDR fell to the lowest level in two months today. Its relative strength line, which peaked in early September, is also falling. Two of the biggest reasons for their fall out of favor are Citigroup and American International Group, which are the two biggest holdings in the Financial ETF. Citigroup fell on rising volume and is threatening to break break its summer low. [Most bank and brokerage stocks fell today]. The biggest damage by far came from two insurance stocks. AIG tumbled 10% to a new 52-week low on massive volume. Marsh and Mclennan (not shown here) plunged an incredible 24%.

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NO OCTOBER BOTTOM YET... October is living up to its reputation as a cruel month. The Dow and the S&P 500 continue to slide on rising volume. The Dow Diamonds are nearing a test of their August low, while the stronger S&P 500 SPDRs are bearing down on their late September low. I'm watching the 9-day RSI lines to see what happens when they reach oversold territory under 30. The Dow is getting close at 30.52 while the S&P 500 still has more to go at 34. Octobers also have a history of forming market bottoms after sharp selloffs. That may not happen, however, until the major averages dig deep into oversold territory, and underlying support levels are thoroughly tested. Until we see convincing signs of a bottom, it's probably best to adopt a wait and see attitude.

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