DOW INDUSTRIALS CLOSES ABOVE JUNE HIGH -- NEW CYCLICAL BUYING

INDUSTRIALS CONFIRM TRANSPORT BREAKOUT... Earlier today I showed the Dow Transports breaking through their June high. The Dow Industrials completed a bullish breakout of their own by day's end. That puts both Dow Averages in intermediate uptrends. The stock that contributed the most to the Dow's breakout was Honeywell. Chart 2 shows the stock breaking through its June high on rising volume. Its relative strength line has started to jump as well. Some other recent Dow leaders have been Alcoa and Caterpillar. What those three stocks have in common is that they're cyclical in nature. Investors' new appetite for cyclical stocks may explain the revived interest in industrial and transportation stocks.

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BUYING CYCLICALS... One way to measure investors' views on the economy is to track the relative performance of economically-sensitive cyclical stocks. These stocks rise and fall with the economy. Chart 3 shows the Morgan Stanley Cyclical Index (CYC). Since the start of July, the CYC has surged to a four-month high. This is first sign of cyclical leadership since late last year. That can been in the relative strength ratio which peaked last December and fell during the first six months of this year. The RS Line turned up at the start of July and has risen to a three-month high. Many of those stocks reside in the Dow Industrials and Transports. In addition to industrials (like Alcoa, Caterpillar, Honeywell) and transports (like CSX, FDX, Ryder), the CYC also includes some new favorites in the chemical, copper, paper, and steel categories.

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