BIG DROP IN OIL BOOSTS AIRLINES -- GM AND IBM LIFT DOW -- GENZYME AIDS QQQQ BREAKOUT -- FIRMER DOLLAR AND RISING BOND YIELDS HURT GOLD
BIG DROP IN CRUDE CAUSES SELLING IN OIL PATCH ... A $2.00 drop in crude oil to below $58 caused some heavy profit-taking in energy shares which were the day's weakest sector. Charts 1 and 2 show the Energy Sector SPDR (XLE) and the Oil Service Holders (OIH) falling on heavy volume. Although no serious damage was done to their current uptrend, it does suggest that both ETFs may test initial chart support along their late June lows and/or their early 2005 highs. The group that benefited the most from falling oil was transportation and airlines in particular.
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DOW TRANSPORTS ARE TESTING JUNE HIGH... The chart of the Dow Transports is showing notable improvement. After bouncing off chart support near its April/May lows, it's now in the process of challenging resistance at its early June high. A decisive close through that chart barrier would complete a "double bottom" reversal pattern. Since the transports were the market's weakest sector at mid-year, their upside turnaround is a good sign. Notice that the relative strength ratio is breaking a down trendline starting in March. That may also be hinting that the threat from rising energy prices is diminishing for the time being. That view is emphasized by today's 4% climb in airline stocks. Chart 4 shows the Airline Index (XAL) surging to the highest level in a month and ending back over its moving average lines. While all of the airline stocks showed good gains today, the strongest trend belongs to Continental. The stock climbed on strong volume today and is close to a new 52-week high. The new buying of transports may be spilling over to the Dow Industrials.
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DOW STARTING TO CATCH UP ... A few weeks back I wrote about the close linkage between the Dow Transports and Industrials. At the time, both were threatening their spring lows. Now both are testing their June highs (Chart 6). A Dow close through that barrier (combined with a similar upside breakout in the Transports) would constitute an intermediate term Dow Theory buy signal. Two of the biggest contributors to the Dow's recent strength are General Motors and IBM. Chart 7 shows GM trading at a new five-month high after climbing above its 200-day moving average earlier in the week. Although IBM is still well below its 200-day line, it's climbed to a new three-month high this week (Chart 8). It looks like money is starting to nibble at some previously-neglected blue chips.
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GENZYME AND NASDAQ 100 BREAK OUT... Last week the Nasdaq Composite broke out to a new 2005 high. Today a similar breakout occurred in the Nasdaq 100 Shares (QQQQ). Volume also picked up which is encouraging. Upside breakouts in the Nasdaq are usually a good sign for the rest of the market. While the QQQQ got some help from tech stocks like Apple, its biggest percentage gainer was a biotech stock. Chart 10 shows Genzyme gapping to a new 52-week high on huge volume. That's not all. The monthly bars in Chart 11 show the biotech leader also closing above its 2001 peak at 64. That also pushed the Biotech Index to a new yearly high today and made it one of the day's strongest groups.
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GOLD FALLS -- RATES RISE ... Oil wasn't the only commodity to encounter selling today. The price of gold fell to the lowest level in more than a month. (Chart 12). Gold stocks are also meeting selling at their 200-day moving average (Chart 13). That may be due to a bounce in the dollar after yesterday's report of a narrower trade deficit in May. It's also possible that rising bond yields are causing some selling in gold. The 10-year T-note yield has risen to the highest level in two months and has exceeded its June high (Chart 14). Some of the money coming out of bonds is moving into stocks. Rising bond yields are, however, causing some profit-taking in rate-sensitive utilities and REITs which were among today's weakest groups.
Chart 12
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