RAILS AND OTHER TRANSPORTATION LOSERS WEIGH ON INDUSTRIAL SPDR -- ENERGY SPDR FAR OUTPACES OIL SERVICE HOLDERS

DOW INDUSTRIALS VS. INDUSTRIALS SPDR ... I've written several times over the past few months that the Dow Industrials were holding up a little better than the rest of the market, and interpreted that to mean that investors were switching from riskier small cap stocks into more stable industrials. That's been especially true for some of the recent Dow defensive leaders like Altria, AT&T, Pfizer, Merck, and oil giant Exxon Mobil. The Dow Industrials shouldn't be confused with the Industrials Sector SPDR (XLI). Chart 1 shows the Dow Industrials bouncing off their June low and trading back above their moving average lines. Its relative strength ratio has held up pretty well against the rest of the market. That's not true of the Industrials ETF shown in Chart 2. The XLI has undercut both its June low and its 200-day moving average. Its falling relative strength line peaked in May and has fallen especially hard over the last month. Although some industrial stocks accounted for the heavy selling, most of it came from transportation stocks. Yes, the XLI includes both industrial and transportation stocks. UPS has been one of the biggest losers this week and over the last month. It saw the biggest drop in its history yesterday and is down again today. Most of the other selling has come from the rails. Two of today's biggest losers are Norfolk Southern and Burlington Northern. Over the last month, the two rails have lost 20% and 12% respectively. That's hurt both the Dow Transports and the Industrials SPDR.

Chart 1

Chart 2

TRANSPORTS GET DE-RAILED... The next two charts show the serious chart damage done to both of the big rail stocks. Both have tumbled well below their 200-day lines and are trading at the lowest levels of the year. Their falling relative strength lines show how badly they've done versus the S&P 500. The RS line for NSC in Chart 3 has broken a yearlong up trendline. BNI hasn't done much better. And both have fallen on monster volume. It seems only fair to suspect that plunges in these economically-sensitive stocks are warning about waning strength in the economy and the stock market. It isn't good news for Dow Transports either which are threatening their 200-day line for the first time in nine months.

Chart 3

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DISPARITY IN ENERGY ETFS ... Chart 5 shows crude oil futures gaining another dollar today and trading well above its 50-average and its June peak at $74. Gasoline prices have a similar chart pattern. Natural gas, which has been weak, is starting to bounce. That's giving a big boost to energy stocks which are the day's strongest sector. When looking at energy stocks, however, it's important to note the significant difference between the two main energy ETFs. Chart 6 shows the Energy Sector SPDR (XLE) which bounced off its 50-day moving average on Monday and is hitting a new three-month high today. Its relative strength line has risen steadily since mid-June. Most of the big buying in the XLE has come from oil giants like Chevron Texaco and Exxon Mobil which are trading at record highs. A number of other energy stocks are approaching that milestone (see below). That hasn't been true of the oil service group which has lagged way behind the XLE. Chart 7 shows the Oil Service Holders (OIH) climbing back over its 200-day line today, but still well below its July peak. Of the two energy ETFs, the XLE is the stronger by far. That's where most of the energy money is being made right now. Continuing strength in the oil patch may also have something to do with the recent selling in transportation stocks.

Chart 5

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ENERGY STOCKS ON THE MOVE ... Three recent leaders in the Energy Sector SPDR are shown below. ConocoPhillips is trading at three-month high and nearing a challenge of its all-time high at 72 (Chart 8). Devon Energy has just broken a six-month down trendline (Chart 9). XTO Energy is nearing its all-time high at 48 (Chart 10). Renewed confidence in energy may boost the stock market over the short-run, but could pose a problem if it means even higher oil prices. Rising energy stocks and falling transports are a bad combination for the market.

Chart 8

Chart 9

Chart 10