BOND YIELDS DROP ON WEAK JOB REPORT -- CHIPS LEAD MARKET -- NATIONAL SEMICONDUCTOR AND TEXAS INSTRUMENT LEAD CHIP BUYING

SEMICONDUCTOR HOLDERS LEAD FRIDAY BOUNCE... The February market rally is drawing strength today from the semiconductor group. Chart 1 shows the Semiconductor Holders (SMH) trading at the highest level in a month and challenging its 50-day moving average. Its relative strength also carries some good news for the group and the rest of the market. After bottoming in September, the SMH:S&P ratio rose into late November before starting to weaken again in December. In late January, the ratio retested its September low and is rising again. That means the chip stocks are starting to help the market instead of hurting it.

Chart 1

TEXAS INSTRUMENTS AND NATIONAL SEMICONDUCTOR LEAD GROUP HIGHER... The next two charts show where a lot of today's chip buying is coming from. Chart 2 shows Texas Instruments rising above its moving average lines as well as a two-month down trendline. Its relative strength is also climbing impressively. So far, the only thing missing is higher volume. Chart 3 shows National Semiconductor breaking through its 200-day average today. That puts it within a point of a new six-month high. Its relative strength line has stayed relatively flat since December, which shows relative stability. Stocks that hold up the best during downside corrections usually become leaders on the next upleg.

Chart 2

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BOND YIELDS FALL SHARPLY ... Both bonds and stocks appear to be benefiting from a sharp drop in long-term interest rates. The 10-year T-note yield is falling today to the lowest level in three months. That's obviously helping bond prices which are moving in the other direction. Rate-sensitive stocks groups -- financials, homebuilding, REITs, and utilities -- are among today's leaders thanks to the strong bond action. Ironically, the drop in yields appears to be the result of fewer jobs being created during January. Weak economic news isn't a good basis for stock buying. That may explain why volume during the recent rally continues to be lackluster. With that caveat, the short-term trend for stocks continues higher.

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