CHIPS AND NETWORKERS GAIN AS OIL LOSES -- THAT'S GOOD FOR THE MARKET -- FALLING OIL IS HELPING THE JAPANESE MARKET
SEMICONDUCTOR HOLDERS REACH FOUR-MONTH HIGH... The chip groups continues to creep higher. Today's buying put the Semiconductor Holders at the highest level since mid-July. Its relative strength line, which bottomed in early September, is creeping higher as well. Two of the day's top percentage chip gainers were Applied Materials and LSI logic. AMAT broke through its 50-day moving average today on rising volume, and appears to be working on the second half of a "double bottom"(Chart 2). Chart 3 shows LSI Logic jumping to a two-month high on very strong volume. Both stocks have been chip laggards up to today. KLAC is another story. It's been one of the stronger chip stocks. Chart 4 shows KLAC closing over its 200-day moving average. Group leaders are usually the first ones that break through that long-term resistance line.
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NETWORK iSHARES EXCEEDS 200-DAY LINE ... Speaking of breaking through 200-day averages, the Network iShares did that today as well. The relative line below the chart (plotted vs. the Nasdaq) shows that this group has been a technology laggard. But that's where relatively cheap opportunities are often found, especially when the ratio line is starting to turn higher. Three of the network leaders are Lucent (Chart 5), Juniper Networks (Chart 6), and Avaya (Chart 7). All three are trading at six-month highs. Avaya closed over its June high today on rising volume.
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CRUDE OIL TRENDLINE BREAK HURTS ENERGY STOCKS ... Last week I showed crude oil testing trendline support near $47. It broke that support line today. The fact that it closed near the top of its daily range, however, made the downside break a little less convincing. Even so, it caused heavy selling of energy shares which were the market's weakest sector. Chart 10 shows the Energy Select Sector SPDR (XLE) threatening its 50-day line on rising volume. The Oil Service Holders (OIH) lost more than 3% -- although on lighter volume. But it fell enough to negate the short-term buy signal that took place on Friday on its point & figure chart. It looks like my initial probe back into the oil patch last week may have been premature. What's bad for energy stocks, however, is good for chip stocks and the rest of the market.
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SOX/OSX RATIO IS TURNING UP ... I showed the next chart on October 12. It's a ratio of the Semiconductor (SOX) Index divided by the Oil Service (OSX) ratio. The point of the earlier chart was to show that the ratio was starting to turn up from chart support formed during early 2003. At the time, the ratio was just starting to bounce. It's bounced more since then. The October message was to take some money out of energy and move it into chip stocks. The second message was that a rising SOX/OSX ratio would be good for the rest of the market. So far that's been the case. And today was no exception. Any day when chip stocks are strong, and energy stocks are weak, has to be viewed as a good market day. Chart 12 shows a point & figure chart of the SOX:OSX ratio, and it's trending higher.
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JAPAN iSHARES TURN UP ... The last time I measured the relative strength of global markets I pointed out that Japan had been the worst performer of the developed markets during 2004. I suggested that part of the reason may have rising oil prices, since Japan is totally dependend on foreign oil. It may not be a coincidence then that Japan is starting to rally as oil is falling. The weekly bars in Chart 15 show the Japan iShares (EWJ) breaking out to a new four-month high today. It's also broken the upper line in an eight-month triangle, which is normally a continuation pattern. Since the trend prior to the the triangle was up, the next leg should be up as well.
Chart 15
