COMMODITY STOCKS HAVE A BIG DAY -- SOX HITS NEW 52-WEEK HIGH AND CONTINUES TO LEAD MARKET HIGHER
COMMODITY STOCKS RALLY ... The recent upturn in commodity markets is igniting new interest in commodity-related stocks. Outside of energy, which remains very strong, other commodity stocks that had a strong day were aluminum, copper, gold, and steel. Yesterday I showed the CRB Index rising to a new five-month high. It gained another 2.81 points today with most commodities rising. Basic materials were one of the day's strongest sectors. Two of the material leaders are shown below. Nucor (steel) broke out to a four-month high. Its relative strength line broke a four-month resistance line in mid-July and has been rising since. Chart 2 shows Phelps Dodge (copper) breaking through its March high to reach a new record. [Copper just recently did the same]. A softer dollar is helping to boost commodities and their stocks.
Chart 1
Chart 2
SEMIS CONTINUE TO SHOW GOOD LEADERSHIP ... In an article written on July 8 entitled "Looking for Second Half Leaders" two of the groups that were highlighted were biotechs and semiconductors. Both have done extremely well since then. Outside of energy, they were the two strongest industry groups during July with semiconductors taking the top spot. The same week that earlier piece was written the Semiconductor (SOX) Index scored a bullish breakout which is shown on Chart 3. Today's 2.5% gain was the best in the market and pushed the SOX to a new 52-week high. While that's good news for the semis, it's also good for the rest of the market. A look at the SOX relative strength line shows why. The chips started to lose market leadership at the start of 2004 and helped lead the rest of the market lower through the first half of that year. After trading sideways from last August to this June, the SOX/S&P 500 ratio has broken out to the highest level in a year. Semiconductor leadership is good for the technology sector. And technology leadership is good for the rest of the market. Two of the top SOX gainers today were Altera (Chart 4) and Maximum Integrated Products (Chart 5). Altera broke an eighteen-month resistance line while MXIM broke out to a new 2005 high.
Chart 3
Chart 4
Chart 5
SOX VERSUS THE OSX ... It's impressive to see the stock market continuing to rally in the fact of high oil prices (which hit a record yesterday) and a strong energy sector. I suspect that semiconductor leadership is one of the factors enabling the stock market to do that. Chart 6 shows the Semiconductor (SOX) Index divided by the Oil Service (OSX) Index. The ratio has been falling since the start of 2004. That's normally a bad combination for the market since it implies energy leadership and technology weakness. The ratio in Chart 6, however, shows that the SOX has done better than the OSX since the start of July. They're both doing very well, but the SOX is doing a little better. As long as that continues, I think the market can continue to do okay in the face of rising oil prices. That's another reason why SOX leadership is so important to the market at this point in time.
Chart 6
