RECORD HIGH IN CRUDE OIL CONTRIBUTES TO STOCK BREAKDOWN -- DOW AND S&P BREAK 50-DAY AVERAGES -- NASDAQ 100 IS THREATENING 200-DAY LINE -- HISTORY SHOWS THAT NASDAQ UNDERPERMANCE IS DANGEROUS

CRUDE OIL ACHIEVES NEW RECORD ... Crude oil jumped $1.40 today to break through its previous record set in late October. That puts oil in uncharted territory. While that helped energy stocks today, it had a very negative impact on the rest of the stock market. That wasn't all the stock market had to worry about. A record trade deficit in the fourth quarter of last year pushed the dollar lower and gold and other commodity prices higher (gold and oil stocks were the only groups in the black). The bond market gained today as money moved out of stocks looking for a safer alternative. That may prove to be a short-sighted move. Because the inflationary impact of a falling dollar and rising commodities should pull bond yields higher and bond prices lower. Even with today's dip in bond yields, the 10-year T-note yield remains above the recent breakout point near 4.40% (Chart 2).

Chart 1

Chart 2

BANK INDEX BREAKS 200-DAY AVERAGE ... One of the signs that the stock market expects higher interest rates is the relatively poor performance of financial stocks -- and banks in particular. The daily bars in Chart 3 show the Bank Index closing under its (red) 200-day moving average. It did the same thing in late February but quickly rebounded back over that long-term support line. I suspect today's breakdown is the real thing. I've overlaid its relative strength line on top of the price bars for easier comparison. You can see how badly the BKX has been performing relative to the S&P 500. A peak in financial stocks is usually an negative warning for the market.

Chart 3

BANKS ARE LEADING INDICATORS ... Chart 4 demonstrates how the leading action of bank stocks can work for or against the rest of the market. The daily bars are the S&P 500 since last summer. The solid line is the Bank Index (BKX). You can see the BKX leading the SPX higher from last August through the end of the year. In that case, relative strength in the banks helped the market. Since the start of 2005, however, the BKX has been much weaker than the SPX and fell decisively below its daily bars during February. That's an example of bank stocks leading the rest of the market lower. Financial stocks are usually the first part of the market to turn down in a climate of rising interest rates. That puts the rest of the market in jeopardy.

Chart 4

DOW AND S&P 500 BREAK DOWN ... All the major market indexes had bad chart days. Many of them broke chart support levels on rising volume. That's a bad combination. Chart 5 shows the Dow Diamonds (DIA) closing under their 50-day moving average. I've overlaid the 9-day RSI line over the price bars to show more clearly the negative divergence I've been writing about recently. Not only did the RSI line fail to confirm the DIA move to new highs a couple of weeks ago, but it's fallen below its late-February low. That signals even lower prices. Chart 6 shows the breakdown in the S&P 500 SPDR (SPY). Yesterday I showed it threatening a two-month up trendline. It broke that and more. Chart 6 shows that the SPY has also broken a rising trendline going back to October. That's even worse. It looks to me like the SPY is heading all the way down to its late January low near 117. If it does, that will constitute a major test of chart support and will help determine if the cyclical bull run has truly ended. I suspect it has.

Chart 5

Chart 6

NASDAQ 100 THREATENS 200-DAY AVERAGE ... The most dangerous situation is seen on the daily chart of the Nasdaq 100 Shares (QQQQ). The QQQQ tumbled to a two-month low today on very heavy volume. More importantly, it's threatening its 200-day average (see arrow). Needless to say, that's a critical test for it and the rest of the market. Any serious breakdown in the Nasdaq market could have serious negative implications for the rest of the market. That's because the Nasdaq also has a history of acting as a leading indicator for the S&P 500. The solid line overlaid on the S&P bars is its relative strength line versus the S&P 500. That line peaked in early December and has been dropping since. History shows that's dangerous.

Chart 7

SOME PREVIOUS MARCH SIGNALS ... Charts 8 and 9 show why it's important to track how the Nasdaq is doing relative to the S&P 500. The daily bars in Chart 8 measure the S&P 500. The solid line is a ratio of the Nasdaq 100 divided by the S&P 500. That ratio peaked in March 2000 (see red arrow) and marked the start of a major bear market. The NDX/S&P ratio led the S&P lower for the rest of that year and longer. Chart 9 shows the NDX/SPX ratio leading the S&P higher at the March 2003 bottom (see green arrow). The Nasdaq 100 relative strength (solid) line led the S&P 500 daily bars higher until the start of 2004 (first red arrow). The ratio line "double topped" at the end of 2004 (second red arrow) and has been dropping throughout the first three months of 2005. That creates a huge negative divergence between the two markets. And it's happening in March -- five years from the March 2000 peak and two years from the March 2003 bottom. That's why a lot is riding on whether or not the Nasdaq 100 falls below its 200-day moving average.

Chart 8

Chart 9