MARKET GETS BOOST FROM PULLBACK IN ENERGY AND UPGRADE IN CHIP STOCKS -- SEMICONDUCTOR HOLDERS ARE CHALLENGING DECEMBER HIGH

ENERGY OVERBOUGHT AND PULLING BACK ... After a spectacular run since the start of January, the energy sector is finally succumbing to some profit-taking after trading in overbought territory for nearly a month. Yesterday's high volume drop -- followed by today's selling -- suggest that the rally is probably putting in a "short-term" top. [Most commodity-related stocks are in the red today as the dollar is bouncing and commodities are dropping -- including gold and oil]. A normal expectation would be for the Energy Sector SPDR (XLE) to pull back to its 20-day moving average which currently sits just below 41 (see blue arrow). Oil Service Holders (OIH) are in a similar situation. Any hint of energy weakness usually gives a boost to the stock market and it's doing so today. The market is also getting a boost from an upgrade in semiconductors.

Chart 1

SEMIS ARE TESTING DECEMBER HIGH ... While energy stocks are the day's weakest group, semiconductors are the strongest. Part of that buying is the result of a brokerage upgrade of the chip group. I've written about the recent improvement in the chip group -- both on an absolute and a relative basis ("Semis Show Leadership" February 24, 2005). Chart 2 shows the Semiconductor Holders (SMH) exceeding the 200-day average in mid-February and then bouncing off of it last week. The SMH is now challenging the high reached in early December at 34.95. Needless to say, that's a critical test for the semiconductors and the rest of the market. Its relative strength line is also trading at a new 2005 high. Chip leadership -- combined with energy weakness -- could go a long way towards extending the current market rally.

Chart 2