CHIPS AND MATERIALS LEAD MARKET LOWER

CHIPS CONTINUE TO FALL ... Earlier today I wrote about the need to rotate existing funds already in the stock market -- as opposed to putting new money into the market. I wrote that I favored the former (rotating) but not the latter (new money). I wrote a week ago that some of the rotating money should be going into drug stocks and/or healthcare (and repeated that advice today). There aren't too many other groups that qualify as market leaders outside of the utilities and possibly consumer staples. Semiconductors are an example of a group that should be avoided at this point. Chart 1 shows why. The Semiconductor Holders (SMH) are one of the day's weakest industry groups. The SMH has fallen to the lowest level in more than two months and is trading under its 200-day moving average. One of the main reasons is the breakdown in KLA Tencor. Chart 2 shows that chip stock falling below its 200-day average on heavy volume. Most of the other chip stocks are falling. In my view, not a good place to be right now.

Chart 1

Chart 2

MATERIALS BREAK SUPPORT LINE... Anther group that's attracting heavy selling is basic materials. It's today's weakest sector. Chart 3 shows the Materials SPDR breaking a support line drawn under its October/January lows. It's also trading under its 50-day moving average and its relative strength line is dropping. The XLB appears headed for a test of its January low and its 200-day moving average. Although materials have entered a downside correction, their longer-term trend is still up. The monthly bars in Chart 4 show the XLB turning down from an overbought condition on its 9-month RSI; Its monthly MACD lines, however, are still positive. And it's well above its 20-month moving average. While heavy profit-taking is clearly in progress, the current decline may present another buying opportunity at lower levels. But not yet. Money is clearly rotating out of this group at this point. The same is true of energy, but not to the same extent. More on that later.

Chart 3

Chart 4