TRANSPORTATION AVERAGE HITS ALL-TIME HIGH -- AIRLINES, BANKS, AND RETAILERS ARE TOP OCTOBER PERFORMERS -- NASDAQ ALSO SHOWS NEW LEADERSHIP

TRANSPORTS HIT ALL-TIME HIGH ... I've written several times over the last few weeks about how the drop in energy prices during October was giving a big boost to the fuel-sensitive transportation stocks. With crude continuing to trade below $60, the Dow Transportation Average has broken through its spring high to reach a new all-time high. Its relative strength ratio, which turned up in late September, is also breaking out. On October 21 and 24 I showed a number of individual stocks acting as transportation leaders. The biggest percentage gains, however, are coming from the airlines.

Chart 1

AIRLINES ARE TOP OCTOBER GROUP ... If you check out "John's Latest Performance Chart" you'll see that the airlines were the market's top group during the month of October. That makes perfect sense. Airlines are the most fuel-sensitive group in the market. They suffer when energy prices rise and prosper when energy falls -- as it's been doing since late September. Chart 2 shows the AMEX Airlines Index (XAL) closing above its 200-day average for the first time in three months. Its relative strength ratio has been rising since mid- September after oil started to slide. That's the market's way of telling us that falling energy prices are having a positive impact on the market.

Chart 2

MORE INTEREST IN BANKS ... Bank stocks were October's second strongest group. Chart 3 shows the PHLX Bank Index (BKX) trading back over its 200-day moving average. The relative strength ratio of the BKX also rose throughout October as oil prices slide. I suspect that the new interest in banks is also attributed to the recent rise in long-term bond yields. Banks were being hurt by the flattening yield curve as short-term rates rose while long-term rates stayed flat. The long-term rate determines what they can charge borrowers. I suspect that some steepening in the yield curve is behind the bank rally. Banks aren't the only financial stocks attracting new money. Several brokerage and insurance stocks are at or close to 52-week highs. That helps explain the bullish breakout in the Financial Sector SPDR (XLF) shown in Chart 4. That financial leadership started right around the time that oil prices peaked. On October 18, I wrote that certain groups would lead any market rally arising from falling oil prices. Those groups included financials, retailers, transports, and technology (October 18, 2005). The financials and transports have done their job. So have the retailers.

Chart 3

Chart 4

RETAILERS GET MARKED UP ... After airlines and banks (financials), the third strongest group in October was the retailers. Chart 5 shows S&P Retail Index closing above its moving average lines. Notice also that its relative strength ratio bottomed in late September and has been rising since then. Falling energy prices help consumer spending which helps retail stocks. The two biggest stocks in the retail group are Home Depot and Wal Mart. Chart 6 shows the recent upturn in Home Depot both in absolute and relative terms. Chart 7 shows Wal Mart rallying off a late September bottom. The solid line beneath the chart is crude oil. The bottom in Wal Mart (and other retailers) took place right after oil started dropping.

Chart 5

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NASDAQ LEADERSHIP ... The last group identified back on October 18 as a potential market leader during the fourth quarter was technology. Which brings us to the Nasdaq. When technology is showing new leadership, that's usually reflected in a rising Nasdaq/S&P 500 ratio line. That line at the top of Chart 8 started to weaken in early August (red arrow) which signaled market weakness. The ratio bottomed in early October (green arrow) and continues to rise. That means that the technology sector is finally showing some upside leadership. The Nasdaq Composite had an especially good day today. It broke decisively through its 50-day average (as did a lot of other market indexes including the S&P 500) and it did so on very strong volume. There can be little doubt that the yearend rally has started. And, as suggested back on October, that rally is being led by the transports (airlines), banks (financials), retailers, and technology.

Chart 8