FALLING OIL AND RISING TECHS ARE GOOD FOR MARKET -- SO IS TODAY'S BREAKOUT IN BROKERAGE STOCKS -- FOURTH QUARTER RALLY HAS BEGUN
DROP IN OIL CAUSES SELLING IN ENERGY STOCKS ... I've written several times recently about two things that needed to happen to ignite the much-anticipated fourth quarter market rally. One was upside leadership by the technology sector, which we've already seen. The second was a drop in the price of oil and selling of energy shares. We're getting that today as well. Crude is plunging $1.72 today on a rise in inventories. That's causing heavy selling of energy shares which are the day's weakest sector. Chart 1 shows the Oil Service Holders (OIH) backing off sharply from their early October peak near 85. Today's selling is coming on heavy volume. If you study the volume bars for the past month, you'll see that the biggest ones are red, which means they occurred on down days. That's usually a sign of a top. The 14-day RSI line continues to lose momentum. And the daily MACD lines, which turned negative a couple of weeks ago, are still negative. Chart 2 shows the Energy Select Sector SPDR, which is also tumbling on heavy volume. Its relative strength line is turning down, which means that energy is losing its former leadership role. While energy is the day's weakest sector, technology is the strongest.
Chart 1
Chart 2
TECH LEADERSHIP ... I've written several articles on the rotation into technology, the most recent one last Thursday entitled "Rotation Into Tech Picks Up Steam -- Led by Internet and Software" (October 21, 2004). That article started by showing the rotation into the tech-dominated Nasdaq market which has been outperforming the blue chips since August. I usually use the Nasdaq 100 Shares (QQQ) as my main technology proxy. Chart 3 shows the QQQ on the verge of a new recovery high. The QQQ has been trading over its 200-day average for most of the last month. Chart 4 shows the Nasdaq Composite Index trying to get over that long-term resistance barrier today. I expect it to do it. A look at the percentage gains near midday tells the tale. The QQQ is the strongest with a gain of 2.3%; the Nasdaq Composite, which usually follows the QQQ, is in second place with a gain of 1.7%; that usually leads the S&P 500 which is up about 1%. That's the order of relative gains that usually takes place in an emerging uptrend.
Chart 3
Chart 4
INTERNET AND SOFTWARE ETFs REMAIN LEADERS... Two of the day's leading technology groups are Internet and software. Charts 5 and 6 show the same two Exchange Traded Funds that I showed last Thursday. Chart 5 shows the Internet Infra Holders (IIH) having exceeded their summer high. Chart 6 shows the Software Holders (SWH) testing that resistance barrier. I think that test will succeed. Semiconductors are also among today's leaders. I recently wrote that technology leadership was good for the market. But technology leadership - combined with energy weakness -- was very good. There's one other group that's turned up that also carries good news for the market -- and that's the brokers.
Chart 5
Chart 6
BROKERAGE INDEX EXCEEDS 200-DAY LINE ... If it's true that brokerage stocks are leading indicators for the market, the next chart also carries good news. Chart 7 shows the Broker/Dealer Index breaking out of a five-month trading range -- and exceeding its 200-day average in the process. Its relative strength line, which bottomed in July, is also hitting a new recovery high. What's good for the brokers is usually good for the rest of the market. Putting these sector trends together, along with the deeply oversold condition in the Dow that I mentioned yesterday, I feel pretty confident in saying that the fourth quarter rally has most likely begun.
Chart 7
