ENERGY STOCKS GAIN -- TRANPORTS FALL

DROP IN INVENTORIES BOOSTS OIL BY A DOLLAR ... A big drop in oil inventories reported today is pushing crude oil nearly a dollar higher today. Crude has been consolidating over the last week within its recent uptrend. It still looks like like crude is going to test its March high near $58. Natural gas prices are also rising. That helps explain why the energy sector is once again the market's strongest sector. At the same time, transportation stocks are being hit hard today. That's not a healthy combination.

Chart 1

ENERGY ETFs TEST LATE APRIL HIGH ... The chart picture for the two energy ETFs shown below continues to improve. Chart 2 shows the Energy Sector SPDR (XLE) testing its late April peak near 43. A close through that barrier (which appears likely) would signal a move back up to its March high. The XLE has been showing good relative strength since mid-May. Chart 3 shows a similar picture for the Oil Service Holders (OIH). It too is testing its late April peak. The biggest stock holding in the OIH is Baker Hughes. Chart 4 shows that BHI has already exceeded its April peak and is nearing a challenge of its February high. That's a good sign for the group.

Chart 2

Chart 3

Chart 4

DOW TRANSPORTS RETEST MOVING AVERAGES ... The Dow Transports are down 55 points in late morning trading. The daily chart shows the transportation average falling to a two week low and testing its 50- and 200- day moving average lines. The biggest reason is the plunge in JB Hunt Transport Services to an eight-month low. That may start to worry Dow Theorists who place a lot of importance in the Dow Industrials and Transports moving up together. Over the short-run at least, their trends are diverging.

Chart 5

Chart 6