MARKET BOUNCE ATTRACTS LITTLE VOLUME -- OIL CLOSES A DOLLAR HIGHER AFTER EARLY SETBACK -- ENERGY SECTOR RECOVERS

OIL RECOVERS FROM EARLY SELLOFF... Crude oil opened sharply lower today and put energy stocks under early selling pressure. The drop in oil also gave an early boost to the stock market. By the afternoon, however, crude had turned a big loss into a dollar gain. Chart 1 shows that today's early drop near $46 resulted in an impressive bounce off its 50-day moving average. The afternoon bounce also kept crude above its mid-December peak at 46.65 (see green circle). And it enabled the energy sector to shrug off earlier losses to turn in an impressive performance.

Chart 1

ENERGY ETFS SCORE UPSIDE REVERSALS ... The daily bars show upside reversals in both energy ETFs. In other words, both opened lower and then closed higher. The Energy Select Sector SPDR (XLE) did so on rising volume which is even more impressive.

Chart 2

Chart 3

AMERADA AND ASHLAND ARE ENERGY LEADERS ... Two of the day's energy leaders are shown below. Amerada Hess has just broken above a three-month down trendline. Its relative strength has already turned higher. Ashland is continuing its recent breakout through its fourth quarter high at 60. The stock is trading at a new record. Its relative strength line took a big jump during January as energy stocks came back into favor. Since the drop in oil this morning was partly behind the stock market's early rally, it stands to reason that the afternoon jump in oil may have undermined confidence in the rally. The market made little headway in the afternoon. And the price gains came on low volume. That's not terribly encouraging.

Chart 4

Chart 5

STOCK GAUGES RALLY BUT ON LIGHT VOLUME ... The market did manage to hold on to its early morning gains, but that's about all. It made no further headway in the face of rising oil prices as the day wore on. Of more concern is that fact that today's market bounce took place on noticeably lower volume. As chart readers know, serious market rallies usually take place on rising volume. That wasn't the case today. The combination of a short-term oversold condition and Iraq's weekend election combined to provide a relief rally. But not a very convincing one. The daily bars in Chart 6 show the S&P 500 SPDRs (SPY) closing at the highest level in a week. It still needs to get back over its 50-day average to improve its short-term trend. The daily stochastic lines have already turned up from oversold territory under 20. The MACD lines have yet to do so.

Chart 6

JANUARY ENDS DOWN ... It's now official. The market ended the month of January in the red. Rather than repeat all the statistics on what that means (if anything), I refer you to the the piece that I wrote on January signals earlier in the month January 07, 2005. Since 1950 up Januarys have been followed by positive market years 91% of the time. Down Januarys have been followed by down market years 58% of the time. That means that up Januarys give better signals than down Januarys. But down Januarys have produced down years almost two-thirds of the time. I wouldn't make market decisions based solely on what the market does during the month of January. But I wouldn't ignore it either.