MONEY IS ROTATING OUT OF BASIC MATERIALS AND ENERGY INTO SEMICONDUCTORS
MATERIALS AND ENERGY ARE WEEK'S WORST ... There appears to be some group rotations going on in the market that's been sparked by the recent drop in commodity-related groups like basic materials and energy. Gold stocks have also fallen sharply. In fact, those were last week's worst group performers. For money managers, leaving the market isn't an option. That money coming out of basic materials and energy has to rotate somewhere else. Last week a lot of that money rotated into semiconductors and biotechs which were two of the week's strongest groups. Two other groups that are starting to show relative strength are financials and retailers. [See "John's Latest Performance Chart"]. Falling commodity stocks usually benefit financial stocks. Since retailers were one of the groups hardest hit by rising energy prices, they should also stand to benefit from falling energy prices. The big question is whether money moving into those groups is enough to offset money coming out of other areas.
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SEMICONDUCTOR HOLDERS TURN UP ... Semiconductors were last week's strongest market group. The Semiconductor Holders (SMH) climbed above their moving average lines on rising volume. The rising relative strength line gives a visual picture of their strong performance. It's also noteworthy that the bounce that started in April occurred just above the January 2005 low. That's how bottoms usually start. From a longer range perspective, however, the SMH would still need to exceed its March high to signal a major upturn. But anytime the chips rally, the technology sector follows.
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IS OSX/SOX ROTATION FOR REAL? ... One way to determine the significance of the recent rotation out of oil service stocks into semiconductors is to study their relative strength ratio. Chart 4 does just that by dividing the Semiconductor (SOX) Index by the Oil Service (OSX) Index over the last ten months. Chart 4 shows that the SOX/OSX ratio has climbed over its 50-day line for the first time since last December. It's now testing the 200-day moving average. Chart 5 shows why that 200-day line is important. The chart shows the SOX/OSX ratio for the last three years. There have been only two other significant 200-day crossings during that time. An upside crossing in the spring of 2003 (green arrow) signaled a shift back to semiconductors. A downside crossing in the spring of 2004 signaled a shift back to energy. It may also be significant that the ratio line is turning up from the same area that marked the late 2002 bottom. Chartwise, the ratio would also have to rise above its late 2004 peak to signal a major shift out of energy and into technology via the chips. It's probably too soon to call this a major rotation. But that's the way the money flows are moving right now. I've written many times in the past that any market upturn would have to be led by technology. That's why it's worth keeping a close eye on the upside progress in the chips.
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TODAY'S BOUNCE WAS ON LIGHT VOLUME -- BUT NASDAQ IS DOING BETTER... Chart 6 shows the S&P 500 SPDRs (SPY) bouncing off the 200-day moving average. Unfortunately, the daily volume was light. That's been a problem throughout the recent rebound attempt. One encouraging sign for the market is the fact that the Nasdaq is starting to do better than the S&P. Chart 7 shows the Nasdaq 100 Shares (QQQQ) breaking their 2005 down trendline and closing over their 50-day average. They're now challenging the 200-day line. The recent upturn in the QQQQ/SPX relative strength line appears to be confirming that the shift into semiconductors is benefiting the entire technology sector.
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