HUGE OIL PLUNGE PUSHES MARKET TO NEW HIGHS -- AIRLINES BREAKOUT -- SOX CLOSES OVER 200-DAY AVERAGE -- NASDAQ COMPOSITE NEARS 2004 HIGH -- FOURTH QUARTER RALLY RESUMES

CRUDE DROPS $3.64 ON THE DAY ... Crude oil plunged over $3 today (-7.4%) and is on the verge of undercutting its mid-November low. That took place after crude had recovered half of its recent price drop from $55 to $45, and suggests the likelihood that it will now drop to the low 40's. While the oil plunge hurt energy stocks, it gave a big boost to the rest of the stock market. Most of the major stock indexes hit new recovery highs on rising volume. Fuel-sensitive airlines had a huge gain of 5.5% and pushed the Dow Transports to a 52-week high. Rate-sensitive utilities sold off on rising interest rates. While oil service stocks were the day's worst group (-4%), semiconductors were among the strongest (+3.7%). Please see my earlier comments for more on the SOX/OSX ratio. December 01, 2004

Chart 1

AIRLINES TAKE OFF... Earlier today I showed the Airline Index (XAL) testing its summer high. Chart 2 shows it closing above that important chart barrier. More than any other group, the airlines are benefiting from the drop in oil. The late-October bottom in the airlines (both on an absolute and relative basis) coincided exactly with the $55 peak in crude. Some of the top airline gainers are shown below. All three are trading over their 200-day moving averages and saw strong upside volume today. Continental hit an eight-month high (Chart 3). Northwest and Southwest Airlines are moving up to challenge their summer high (Charts 4 and 5). Strength in airlines is normally associated with weakness in crude oil. That's why a strong airline sector is a double positive for the rest of the market.

Chart 2

Chart 3

Chart 4

Chart 5

CHIP LEADERS... Earlier today I also showed the Semiconductor (SOX) Index retesting its 200-day moving average. [It closed slightly above it] Three of the standout chip performers are charted below. All three show a bullish combination of price and volume action. Applied Materials is on the verge of breaking out of a five-month basing pattern (Chart 6). Novellus is already challenging its October high and its 200-day moving average (Chart 7). KLA Tencor has already exceeded its 200-day line (Chart 8). Strength in the chips boosted the Nasdaq which led the rest of the market higher.

Chart 6

Chart 7

Chart 8

NASDAQ COMPOSITE NEARS EARLY 2004 HIGH -- STILL LEADING MARKET HIGHER... It's usually a good sign when the Nasdaq market is rising faster than the S&P 500. And that's been the case since August. The Nasdaq/S&P 500 ratio, which had been dropping since January (see red arrow), turned up during August (see green arrow) and signalled the start of the current upleg. The upside break of the yearlong down trendline in the ratio was broken during October (see circle) which confirmed that the Nasdaq has embarded on a more lasting leadership role. The ratio hit a new recovery high today as the Nasdaq's gain of 1.9% outdid the S&P gain of 1.5%. That's a positive sign. As long as that pattern continues, so will the rally. Pricewise, Chart 9 shows the Nasdaq Composite moving up to within 15 points of its early 2004 intra-day peak at 2153. That will be another test for the market. The Nasdaq 100 has already cleared that chart barrier which is encouraging. The S&P 500 also closed at a new 2004 high. Today's heavy volume was especially impressive. Admittedly, I had been looking for a bit more consolidation before the fourth quarter rally resumed. It looks, however, like today's plunge in crude oil was enough to override the market's short-term concerns. The good news is that the fourth quarter rally is still alive and well.

Chart 9