AT&T LEADS TELECOM GROUP HIGHER- RISING RATE FUNDS FOLLOW BOND YIELDS HIGHER -- SMALL CAPS ARE GETTING SMALLER -- NO SAR BUY SIGNAL IN GOLD YET

TELECOM HOLDERS ARE HAVING A GOOD YEAR ... With the market selloff that started in May, a lot of defensive groups have attracted new money -- including consumer staples and utilities. The telecommunications group belongs on that list. Chart 1 shows why. Telecom Holders (TTH) have been one of the top performing ETFS since the middle of May. The chart shows the TTH turning up in the middle of last month and climbing back over its 50-day moving average. It's trading at the highest level in two months. The relative strength line turned up in mid-May as well. In fact, the telecom group has a good 2006. The relative strength ratio turned up at the start of the year. That's a change from its prior years' poor performance.

Chart 1

NEW TELECOM LEADERSHIP... The weekly bars in Chart 2 show the Telecom Holders nearing a new four-year high. The relative strength line, however, shows that telecom leadership is a new phenomenon. The chart shows the group's relative strength ratio falling throughout the entire cyclical bull market that started in the spring of 2003. Until 2006. The RS line turned up at the start of the year and has broken a down trendline starting at the end of 2002 (see circle). That's a sign of new leadership. One possible explanation for the new telecom popularity may be investors' recent preference for large-cap value stocks that are considered to be less dangerous than small caps and growth stocks.

Chart 2

AT&T AND VERIZON ARE DOW LEADERS ... Two of the biggest reasons for the rise in the Telecom Holders are the recent strong performances by AT&T and Verizon. They happen to be the two top holders in the TTH (and account for 50% of its value). They also happen to be two of the strongest Dow performers over the last month. AT&T's gain of 10% makes it the top Dow gainer in percentage terms since mid-May. Verizon's 6% gain make it the Dow's third top gainer. [They also help explain why the Dow Industrials have held up better than the rest of the market. It includes a lot of large cap value stocks that investors prefer in a weakening market]. Chart 3 shows AT&T nearing a test of its February intra-day high at 28.47. Its relative strength ratio (versus the Dow) is also near a new 52-week high. Verizon hasn't done as well. But it has just cleared its 50-day average and is starting to show new Dow leadership. That's shown by its rising relative strength line which appears to be forming a double bottom.

Chart 3

Chart 4

PROFUNDS TELECOMMUNICATIONS FUND TAKES TOP SPOT ... New telecom leadership is also reflected in the past week's ProFunds relative strength mutual fund rankings. The ProFunds Telecommunications Fund (TCPIX) took the top spot. Chart 5 (plotted through Friday) shows the fund bouncing off its 200-day average in May and ending last week back over its 50-day line. Its relative strength ratio shows the fund outperforming the S&P 500 all year. That appears to confirm the relatively strong action shown by the Telecom ETF shown in Chart 1 which is the top sector ETF for the last month.

Chart 5

RISING RATE FUNDS ALSO LEAD ... Rising rate funds are also among the ProFund mutual fund leaders. A couple of months ago I wrote an article on two mutual funds that are designed to profit from rising bond yields (April 14, 2006). And with bond yields on the rise, the two funds are doing just that. Chart 6 shows the ProFunds Rising Rates Fund (RRPIX) closing over its 50-day average on Friday after a modest pullback. That fund is designed to rise 125% as fast as the 30-year Treasury bond yield. The fund in Chart 7 (plotted through Friday) is the ProFunds Rising Rates 10 Fund (RTPIX). It's designed to match the yield on the 10-year Treasury note yield. And it's doing its job as the 10-year T-note yield (TNX) in Chart 8 shows.

Chart 6

Chart 7

Chart 8

SMALL CAPS ARE GETTING EVEN SMALLER ... Paragraph two mentioned investor's new preference for the type of large cap stocks that reside in the Dow Industrials when they sense that a stock market slide is in progress. The corollary to that is they sell small cap stocks that are perceived to be riskier investments. And that's just what they've been doing. Chart 9 shows S&P 600 Small Cap Index trading under its 200-day average (along with most other stock indexes). The real story in Chart 9 is the relative strength ratio (SML/SPX) which peaked in May and continues to drop. That means that small caps are falling faster than large caps. That's another sign that investors are selling off their riskier investments and shifting funds into less risky ones. In addition to the small cap weakness, the inability of most market indexes to climb back over their 200-day averages is also some cause for concern. A close back over the 200-day line by the small cap index (as well as the large cap S&P 500) is the very least the market would need to do to signal a serious rally attempt.

Chart 9

STILL NO BUY SIGNAL IN GOLD ... Throughout the parabolic rise in the price of gold during the months of April and early May, I suggested using the Parabolic SAR stops to pinpoint an exit point if and when gold started to drop. The last buy signal in gold had been given during the last week of March (green arrow), and remained in force until Monday May 15 when an SAR sell stop was hit (red arrow). I wrote an article that day describing the sell signal in gold and several other commodities. To date, that sell signal hasn't been reversed. Chart 10 shows the streetTracks Gold Trust Shares (GLD) falling close to their 200-day average and possible chart support along February/March lows. No buy signal has been given, however, by the SAR system. To get an initial buy signal, GLD would have to hit the last SAR dot which today sits at 58.57. You might want to keep an eye on that indicator if you're getting itchy to do some gold buying.

Chart 10