OIL SPIKE BACKS OFF FROM $70 AS STOCKS RECOVER EARLY LOSSES -- AUGUST ROTATIONS SHOW A MORE DEFENSIVE MARKET
ENERGY RALLY FADES... The threat from Hurricane Katrina caused an early spike in oil prices to $70 which caused early selling in stocks. As the day wore on, however, crude gave back most of its early gains to close up $1.15 at $67.20. The late pullback helped stabilize the stock market which ended the day on the plus side. The dramatic oil action is largely reflected in the 15-minute bars of the Oil Service Holders (OIH) in Chart 1. An early spike pushed the OIH to a temporary two-week high. By day's end, however, it had fallen all the way back to last Friday's low. The intra-day volume bars also show that the early spike was met with some fairly heavy profit-taking. It also suggests that today's oil surge to $70 was overdone and in need of some short-term corrective action. That was enough to erase early stock market losses.
Chart 1
OVERSOLD MARKET HAS LOW-VOLUME BOUNCE ... While the market experienced a decent price bounce today, the level of volume was disappointing. Today's bounce may also be the result of a short-term oversold condition in the major market averages. The 9-day RSI for the Dow Diamonds is close enough to the 30 level to inspire a bounce. The daily price bars also show the DIA near a rising trendline drawn under the April/July lows. The green bars in the MACD histogram, however, are still negative. The S&P 500 SPDRs in Chart 3 also rallied, but on lower volume. The more sensitive stochastic lines are in short-term oversold territory under 20, but the 12-day Rate of Change (ROC) is still in negative territory below zero.
Chart 2
Chart 3
AUGUST ROTATIONS SHOW DEFENSIVE MARKET ... Last Thursday I showed a deteriorating long-term picture for the stock market which includes negative divergences on weekly indicators, a negative seasonal pattern as we enter the autumn, and a four-year cycle that's entering it's most dangerous stage between now and the second half of 2006. Another way to tell if the market is looking weaker is to study the relative strength rankings. If you look at John's Latest Performance Chart posted earlier today, you'll see that the strongest market groups during August are gold, energy, utilities, and healthcare. All are defensive in nature. By contrast, the weakest groups were housing (and REITS) along with retailers. Banks and basic materials also fared poorly. The drop in retailers betrays some loss in consumer confidence. The most serious development of all may be the drop in housing. It's too soon to tell if August weakness signals a major housing top. But a lot of investors aren't waiting around to find out. One month's sector rotations don't make a major trend. But they do suggest a market that's turning more defensive.
