HURRICANE FEARS CAUSE ENERGY SPIKE -- CONSUMER DISCRETIONARY STOCKS LEAD MARKET DECLINE -- CHIPS LEAD TECH SELLING

CONSUMER STOCKS ARE UNDERPERFORMING ... The latest consumer confidence report showed the biggest drop in years. While that may have been an over-reaction to the shock of Hurricane Katrina, consumer confidence has been dropping all year. We can tell that by looking at the relative performance of consumer discretionary stocks. As the name implies, these are stocks that deal with products that consumers want, but don't necessarily need (unlike consumer staples). The consumer discretionary stocks include anything related to autos, homebuilding, and retailing. Last week I showed the recent breakdown in retail stocks which is continuing today. Chart 1 shows the S&P Retail Index trading under its (red) 200-day average for the first time since May when the latest market rally began. Its relative strength ratio peaked in early August and is trading at a four-month low. Chart 2 shows an even worse performance from the Consumer Discretionary SPDR (XLY). First of all, its August peak fell short of its early 2005 peak. Secondly, the ratio line for the XLY has undercut its May low. That means that consumer discretionary stocks are leading the market lower. That's another sign that consumers are losing confidence and are cutting spending. Consumer spending accounts for two-thirds of the economy.

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ENERGY ETFS HIT NEW HIGHS ... Given the big jump in energy prices today, the market reactions were not surprising. All of the energy Exchange Traded Funds hit new bull market highs. Chart 3 shows the 9-day RSI for the Energy SPDR (XLE) moving back over 70 which is overbought territory. But the trend is still clearly higher. Chart 4 shows the Oil Service Holders (OIH) also hitting a new high. It recently found support at its (green) 20-day average. Volume wasn't all that heavy today which may be a caution sign not to get too carried away by the big price advance. Not surprisingly, today's oil spike caused more market profit-taking. Most of it came the Nasdaq 100 and chip stocks. That carries a warning sign.

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NASDAQ 100 AND CHIP ETF CLOSE BELOW 50-DAY LINES... No serious chart damage was done today to the overall market. But there were some disturbing signs of deterioration. Those signs are coming from the technology sector. Chart 5 shows the Nasdaq 100 Shares (QQQQ) closing just below the 50-day moving average. Fortunately, volume was light. But any further slippage in the QQQQ would carry negative implications. Not just for the QQQQ, but the rest of the market. That's because Nasdaq leadership is crucial for the market. The QQQQ:S&P ratio line peaked at the start of August and is slipping again. That means the Nasdaq market, which has led the market rally since the spring, may be losing its leadership role. The same is true for the semiconductor group. Chart 6 shows the Semiconductor Holders (SMH) closing well below the 50-day line today for the first time in several months. Volume was light. But the SMH:S&P ratio line is starting to slip. With oil prices on the rise, the last thing the market needs is a downturn in the technology sector.

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